Record Chinese Manufacturing Drives Optimism

As reported in the Financial Times, Chinese manufacturing activity expanded at a record pace in the first quarter of this year in yet another sign of the country’s strong recovery due to rebounding external demand and growing domestic consumption. According to the HSBC/Markit Economics survey released this week, Chinese manufacturing activity in the first three months of this year was the fastest since the series began in 2004. New orders expanded for the 12th straight month, with the reading the third strongest in the survey's history.

Chinese shares rebounded to a ten-week high and copper rose to the highest level in almost three months. Lu Ting, China economist at Bank of America Merrill Lynch, said manufacturers would continue to expand activity despite a scaling down of government stimulus. "Officials in Beijing are just controlling investment to avoid over- heating. The rest of the economy is still strong,” said Mr. Lu. Chinese activity rose to 57 in March from 55.8 in February. As you may know, a reading above 50 signals an expansion, while one below that threshold represents a contraction. Chinese producers have boosted their manufacturing in part because the country’s exports have rebounded strongly. Chinese exports in February were almost one and half times their level a year ago. China also released its official PMI figures which showed the index rose to 55.1 in March from 52 in the previous month, the thirteenth straight month of expansion.

Qu Hongbin, China chief economist at HSBC, said the robust PMI numbers and export growth suggested that theChinese economy would grow at an annualized rate of 11 percent in the first quarter this year. Last month, Wen Jiabao, the Chinese premier, said China would maintain “pro-active fiscal policy and moderately easy monetary policy” while implementing “strict controls” over new infrastructure investment. The manufacturing data led to renminbi forwards rising on optimism the government will permit the currency to strengthen for the first time since mid- 2008. Twelve-month non- deliverable forwards reflected bets the currency will strengthen 2.5 percent from the spot rate of 6.8263, according to data compiled by Bloomberg.The renminbi may appreciate to 6.74 per dollar by the end of June and 6.66 by the end of September, Helen Qiao and Song Yu, Hong Kong-based econ- omists at Goldman Sachs, said in a research note published this week.

The recent data regarding China’s economy provides many reasons for optimism over the remainder of this year and into 2011. We are seeing many opportunities through our network in the second and third tier cities at low valuations that offer significant future returns. The nature of the current deal flow and the recent strong economic data continue to affirm our belief that China provides the most favorable environment for investment in the world today.

Adam Roseman

Founder & CEO ARC China