China: Reawakening the Industrial Titan

January 3rd, 2013
in contributors, syndication

by Ben Shepherd, Featured Expert, Investing Daily

China is emerging from a checkered year to once again play the role of global growth engine. China’s National Bureau of Statistics (NBS) released on December 26 a key data point showing that the country’s economy has most likely bottomed out.

After six months of continuous declines, industrial profits finally turned a corner and began slowly rising in September. Yesterday afternoon the NBS said that the rise continued as industrial companies with revenues above CNY20 million (about USD 3.2 million) jumped by 22.8 percent in November on a year-over-year basis to CNY638.5 billion.

Follow up:

In the first 11 months of 2012, profits were up by 3 percent versus the same period last year. In all, 30 of the 41 covered industries reported growth, the highest number of positive reporters in nearly a year.

According to the data and reports from Chinese companies on the ground, sales have grown nearly across the board. Profit margins are also finally improving, since most companies have finally worked through most of their older inventories which were manufactured when input costs were much higher, boosting margins.

There are two major reasons that Chinese industrials are finally gaining steam.

The first, and most obvious, is that fact that global confidence is generally improving. The US continues to see green shoots in the real estate market, as home prices stabilize and even some of the hardest bitten markets get on track to post their first annual gains since 2006. Home sales are improving and the massive supply overhang in both new and existing homes is finally beginning to shrink.

Moreover, the US unemployment rate is now down to 7.7 percent. That’s not necessarily indicative of a dramatic improvement—scores of long-term unemployed aren’t reflected in the official data because they’ve dropped out of the labor market and haven’t been lured back in. But at least the trend is moving in the right direction.

Confidence is even improving among America’s financial advisers. The Adviser Confidence Index, maintained by Rydex AdvisorBenchmarking, made a big jump in December as finance professionals reported dramatic improvements in the their latest outlooks on the economy, six-months and twelve-months out. They also reported a major jump in their outlook for the US stock market. That’s surprising, since as of this writing Congress had yet to make headway in dealing with the fiscal cliff.

Even the situation in Europe is improving. Standard & Poor’s last week boosted Greece’s credit rating from selective default, to B-minus with a stable outlook. Citing the clear commitment of euro zone members to keeping Greece within the fold, S&P struck its most optimistic note on the country’s future in more than a year.

As global confidence continues to firm, demand for Chinese exports will improve and drive industrial profits higher. The country’s manufacturers are returning to work, which will help stem China’s own rising unemployment and give domestic demand a shot in the arm.

The Chinese government has also been loosening its strictures on the country’s property markets, as policymakers’ inflation worries abate.

China’s Ministry of Housing and Urban-Rural Development remains committed to policies to keep real estate prices in check, by requiring high down payments and introducing a form of property tax.

However, lower bank reserve levels have helped spur property lending in the country. As with the US, that’s led to stabilizing property values in many parts of the country, especially the coastal regions, and has increased the feeling of wealth among Chinese property owners. Just as American consumers feel more confident when property prices are stable and the stock market is rising, so do the Chinese.

Admittedly, 2012 has been a tough year for China, but the country appears to be turning a corner as 2013 beckons. Assuming an external shock doesn’t knock China on its heels—say, the failure of the US Congress to address the fiscal cliff or a major meltdown in Europe—the Middle Kingdom is likely to enjoy a very prosperous new year. And that’s good news for the rest of the world.

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