Opinion

New Year heralded in on wave of optimism

By Andrew Moody (China Daily)
Updated: 2010-01-04 08:05

The Shanghai Composite Index could hit 4,000 as the bull market rally is set to continue in 2010, according to leading market experts.

Buoyant equity markets, strong economic growth but with a risk of inflation and a property market bubble are just some of the predictions of a panel of experts interviewed by China Daily.

The Shanghai Index fell through the psychological 4,000 barrier in March 2008 and if it recovers to that level in 2010, its 2007 peak of above 6,000 may again be within sight.

New Year heralded in on wave of optimism

Adrian Mowat

Adrian Mowat, chief Asian and emerging market strategist for JP Morgan Chase, says 4,000 is achievable again in 2010.

"We think equities growth is going to continue to be quite healthy next year, with the Shanghai index rising to at least 3,800 and possibly 4,000," he says.

"We expect equities in emerging markets as a whole to rise 30 percent and in developed markets by 20 percent next year."

Ma Jun, Deutsche Bank's Greater China chief economist, believes the Shanghai market could rise by 15 percent next year but the growth is unlikely to match its rapid recovery in 2009.

"I think it will be a mild bull market with no prospect of a bear. It will not be straight line growth in 2010, however, but something more complex. The year will start with positive initial growth followed by some corrections but ending up positive over the whole year," he says.

New Year heralded in on wave of optimism

Ma Jun

Ma believes 2010 will be quite a pivotal 12 months for the economy as a whole with the economy slowing in the middle of the year and a risk of inflation increasing to 5 percent - although his central forecast is 3.4 percent.

China's Consumer Price Index (CPI) rose 0.6 percent in the year to November, although food prices, which make up a third of the index, climbed 3.2 percent.

"The biggest consequence of higher inflation would be destabilization of the banking system. People would take money out of banks and buy assets which would only fuel inflation and create asset bubbles, like in the property sector," he says.

"Economic growth is going to decelerate from the middle of the year and this is going to be a difficult period for the economy. It will feel a bit like stagflation at times."

Zuo Xiaolei, chief economist with China Galaxy Securities, also believes there is an inflation risk in 2010.

Zuo Xiaolei

"It depends on a number of factors but we believe inflation could be close to 4 percent. It really depends on the government and the policy and how inflationary expectations are managed," she says.

Mowat at JP Morgan Chase adds that while inflation might become a concern in China in the second half of the year, there is very little risk of inflation being a global phenomenon.

"I think the risk is non existent. You have 10 percent unemployment in the United States. All our models say that core inflation will be falling next year. I think interest rates in the major developed countries will remain at historic lows during the whole of 2010," he says.

A major concern remains asset price inflation and an unsustainable bubble in the housing market.

Wang Tao, chief China economist at investment banking group UBS, says recent data are a worrying indicator.

Wang Tao

She points to the number of new housing starts in November increasing by 200 percent and house sales up 100 percent.

"These are historically high figures and it will now take some very skilful management to avoid a property bubble. The problem will probably start appearing in 2011. How big any burst will be will depend on how big the bubble becomes," she says.

Martha Wang, portfolio manager for investment group Fidelity International's China Focus Fund, says she expects equity markets to show continued volatility in 2010.

She believes there will be nervousness when the Government's stimulus measures begin to peter out since it might eventually lead to policies to rein the economy in.

"Equity market sentiment will probably remain volatile until investors are convinced that there is indeed a meaningful gap between the end of easing and the beginning of tightening," she says.

But she adds: "I remain positive about China given the economic growth momentum and the government's inclination to ensure the rapid pace of expansion."

Terence Ho, strategic growth markets and IPO Leader, Greater China, for international businesses advisers Ernst & Young, believes there will be major financial activity on the China equity markets in 2010.

He expects the funds raised by Initial Public Offerings (IPOs) in Hong Kong will exceed the record high of HK$280 billion in 2007.

"The evidence all points that way and it would be the highest figure in Hong Kong history. Those seeking IPOs will be mainly Chinese companies but there will also be companies from other jurisdictions such as Australia, Germany, Russia and other countries from the former Soviet Union, " he says.

"We are also optimistic about the IPO market in Shanghai and Shenzhen, based on our preliminary data."

Ho believes 2010 could see a fundamental shift in the balance of power from developed countries to the BRIC (Brazil, Russia, India and China) developing countries in the IPO and capital markets.

"China has been one of the least hit by the financial crisis, the earnings of Chinese companies remain strong and there is strong liquidity in the capital markets," he says.

He also believes the markets as a whole in China will remain strong next year.

"It will be the continuation of the bull rally. From the people I come into contact with in connection with IPOs there is very little concern about the market in 2010," he says.

All the experts we questioned predicted economic growth would be slightly up on the 9.6 percent this year.

Zuo Xiaolei at China Galaxy Securities predicted it could reach as high as 10 percent.

"In the early part of this year we predicted growth would be strong and everybody was skeptical and we were right. We definitely think growth will be higher this year, somewhere between 9 and 10 percent, " he says.

Zuo also thinks smaller businesses will be the engine of growth in the economy next year, rather than State owned enterprises, which have benefited from the government's stimulus package this year.

"I think government policy will give more support to small businesses next year, which is where 90 percent of new job creation in China comes from. I don't think government investment in SOEs is sustainable at its current level" he says.

In terms of sectors, Mowat at JP Morgan Chase believes banks in China will be strong next year.

"We think the banks can generate very healthy earnings growth. They combine this with having a dividend yield of between 3 to 5 percent," he says.

Zuo at China Galaxy Securities believes the new energy industry sector and leisure industries, such as tourism, should do well in 2010.

She also believes consumer goods industries involved in exports will do well, predicting that export growth next year of up to 15 percent will account for between 2 and 3 percent of China's GDP growth.

"Exports did not have a positive contribution to growth this year but it will be different in 2010 as demand from overseas countries recovers," she says.

Overall, 2010 looks likely to be the year the trauma of the economic crisis begins to be seen in the rear view mirror.

"The economy is already positioning itself for post-crisis mode," says Wang Tao, at UBS.

"It will be a very different year from the one we have just had. I think with some withdrawal of the stimulus package and without a strong external recovery we will begin to get a judgment on what China's normal trend growth should be."