No fat lady singing in China

Shanghai-China-city-skylineOur most recent trip to China found a slowing economy but no fat lady singing. In fact with a population of around 1.3 billion and a government that can use big economic levers at any time to rebalance the economy both nationally and regionally, our conclusion is that there is a lot of negativity priced into stocks dependent on China. Too much.

The China property market is a key driver of steel production. The property market continues to slow. This is exactly what the government wants as a housing bubble does nothing to help the population find satisfactory housing. A tightening in credit availability from banks and demanding deposit requirements imposed by the Central Government have already deflated the property market. The question is:  how much is too much?

At the recent National People’s Conference in March, Chinese Premier Wen Jiabao said that this  was  not the  time to relax the rules on housing. But that time will come. And when it does it will be by relaxing the liquidity constraints on the banks and lowering deposit requirements on housing.

While the high dollar  limits the ability of the Australian equities market to rise, investment flows have moved away from resource plays, particularly iron ore stocks now for some nine months. Just take a look at the RIO chart relative to any bank and you will get the idea.

The resource sector will be shunned until either:

1.  the Chinese economic statistics suggest the rate of slowing in China has itself slowed or

2.  more favoured non resource sectors are seen to be fully priced or

3.  the strategic value of resources in the ground is made obvious by a corporate raid on a target that has been the subject of market selling for the last 9 months. We saw the same issue in MacArthur Coal last July which fell below $11 before being taken over at $16.50 only months later.

Iron ore stocks, RIO in particular, has been  over sold through to March 2012 .