Goldman on China

China is oversold, says Goldman

Goldman Sachs says the gap between investor sentiment and earnings in China is the biggest it has been in more than a decade.

A multitude of concerns have overshadowed China’s prospects during 2011, including slowing growth, rising inflation, ballooning local government debt, overheating property prices and mounting bad loans among the banks. But it is not all bad news. Goldman Sachs reckons that China will be able to maintain decent growth during 2012 and 2013, despite some risks remaining.

“We think that China overall growth for next year will continue to be fairly stable and strong,” said Helen Zhu, chief China strategist at Goldman Sachs. Despite revising down the eurozone’s predicted economic growth to -0.8% from 0.1%, Goldman Sachs estimates that China will grow by 8.6% in 2012, which is slightly higher than the market consensus of 8.5%. Predictions for most countries in the rest of the world are below consensus.

Goldman Sachs also points out that the 8.6% growth rate for China during 2012 is below the 9.2% growth achieved in 2009, while the global economy will grow by 4% — marginally stronger than in 2009.

There have been concerns about the health of government revenues given that land sales are expected to slow down after policymakers intervened to cool the property market. Taxation and fiscal revenues will provide the buffer, according to Zhu. Goldman Sachs estimates that total government revenue will continue to grow to Rmb16 trillion ($2.5 trillion) by 2015, up from the current Rmb12 trillion ($1.9 trillion), with the contribution from land sales declining to 10% in 2015 from 23% this year.

However, the substantial rise in lending is still a worry. Although China can loosen its monetary and fiscal policies to drive up growth, it has far less room than it did during 2008 and 2009. China’s total credit hit 197% of GDP during the first half of the year, up from 152% before 2008. In fact, China has a higher credit ratio than many countries with similar GDP per capita, such as Brazil, Thailand and Russia.

“Since the global financial crisis, China has levered up a lot,” said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs. “It has now used up that space [for easing policies] and needs to be a little more cautious.”

China recently cut bank reserve ratios by 50 basis points to avoid a growth slowdown. “China has already started to ease policies,” said Buchanan. “We do not expect any repeat of what we saw in 2008, but roughly speaking we would expect [the easing policy] to continue.”

Although risks exist, Timothy Moe, chief Asia-Pacific strategist at Goldman Sachs, said that the market has overreacted. “We think the market is pricing in concerns a lot more than it should do,” said Moe. “You have the biggest gap between the market and earnings that we have seen in a decade and a half.”

“We continue to maintain our relative preference for China versus the rest of the Asia-Pacific region in terms of equity returns,” Zhu added.

¬ Haymarket Media Limited. All rights reserved.
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