Fisher Investments Editorial Staff
Emerging Markets

Reasons to Be Bullish on China

By, 02/15/2012

In our view, emerging Asia and particularly China is a bright spot in 2012. As we’ve written before, China’s government has every incentive to stoke growth in a leadership-transition year.

However, taken on the surface, recent news out of China may not seem so encouraging. January loan growth badly missed estimates while money supply growth rates fell to a decade low. Exports also went negative for the first time since 2009. Not very bullish if the trend continues; however, there are many signs the trend is changing.

We know, historically, as China’s money supply goes, so goes the country. This is true for everything from the economy to inflation (with roughly a six-month lag) to oil demand to equity market valuations (seen in Exhibits 1-4).

Exhibit 1: China Real GDP Versus Money Supply

Source: Thomson Reuters.

Exhibit 2: China Inflation Versus Money Supply

Source: Thomson Reuters.

Exhibit 3: China Oil Demand Versus Money Supply

Source: Thomson Reuters.

Exhibit 4: China P/Es Versus Money Supply

Source: Thomson Reuters.

We also know bank lending tends to track money supply historically (which means you could substitute bank lending into any of the charts above in place of M1 and get the same relationships). This appears to be because of China’s limited capital markets (bond and equity), causing over two-thirds of all funding to go through the banks.

Exhibit 5: China Loan Growth Versus Money Supply

Source: Thomson Reuters.

So a key question is: What is China planning to do with loan growth and money supply? The government could leave money supply growth rates at current cyclical lows and risk social discontent (no coincidence—these are also roughly the level of money supply growth at which the Tiananmen Square riots occurred), or it could choose to re-accelerate.

Exhibit 6: China Money Supply Growth

Source: Thomson Reuters.

Risking social discontent seems unlikely in a year when the government is inherently less stable than usual, tied to new leadership appointments being announced at every government level. In fact, China historically accelerates its economy in these “election” years to help maintain social stability. It’s also worth noting in order to accelerate without sending inflation skyward, the government also usually decelerates the economy the year before.  (See Exhibit 7.)

Exhibit 7: Relative GDP Growth: Annual 30-Year Trend (1980-2010)

Source: Thomson Reuters.

China appears to be following this pattern and is starting to re-accelerate. The government typically decides on annual loan quotas (used to control lending) at its year-end economic planning conference. Therefore, loan growth historically troughs or peaks in November and changes direction in December. This appears to have occurred again, with loan growth recently reaching a trough in November and re-accelerating in both December and January. While it may take a month or two for money supply to follow, remember: As loan growth goes, so goes money supply and the rest of China. (See Exhibit 8.)

Exhibit 8: China Loan Growth Versus Relative Performance

Source: Thomson Reuters.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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