China Growth Estimates Lowered on Monetary Tightening

Investment banks such as Goldman Sachs are lowering their projected growth for the Chinese economy given the recent monetary tightening policies enacted by the Chinese government in an attempt to curb inflation. From Bloomberg News:

Goldman Sachs Group Inc. joined banks lowering their forecasts for China’s growth as Premier Wen Jiabao’s campaign to rein in inflation restrains the world’s fastest-growing major economy.

China’s gross domestic product will gain 9.4 percent in 2011, less than a previous call of 10 percent, Goldman analysts Yu Song and Helen Qiao wrote in a note to clients today. Credit Suisse Group AG, JPMorgan Chase & Co., ING Groep NV and Daiwa Securities Group also pared their estimates this month.

The changes underscore increasing concern among investors about the impact on corporate earnings from Wen’s efforts to curb credit, with the benchmark stock index today falling to its lowest level since January. Evidence of the slowdown may prompt policy makers to ease off on further monetary tightening, the Goldman analysts said.

In addition to forecasting lower growth, Goldman Sachs is also projecting higher inflation rates in China and a potential 5-10% drop in Chinese stock prices. From San Francisco Chronicle:

Goldman Sachs Group Inc. said it wouldn’t “rule out” a further decline of up to 10 percent for Chinese stocks as growth in the world’s second-biggest economy slows and inflation accelerates.

The U.S. bank cut its forecasts for China’s gross domestic product growth for this year and next to 9.4 percent and 9.2 percent respectively, while raising its inflation forecasts to 4.7 percent and 3 percent, without specifying its previous projections. Goldman Sachs also lowered its end-2011 target for the Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, to 14,500 from 16,500 amid “policy intervention” and higher oil prices. The index rose 0.4 percent to 12,670.56 at 11:30 a.m. in Hong Kong.

“We would not rule out a correction of up to 5 percent to 10 percent near term, triggered by earnings per-share cuts, but would buy on such dips given low earnings risks, valuation, likely policy inflection,” Goldman Sachs analysts led by Helen Zhu and Timothy Moe said in a report today. It expects inflation to peak in June and forecasts “normalization of policy sometime in the third quarter in 2011,” according to the report.

Chinese stock prices have also been affected, falling to new 3 month-lows. From Reuters:

China shares fell to a 3-1/2-month low on Monday, dragging Hong Kong lower, as retail investors piled into a selloff after a spike in money market rates and a softer reading on Chinese manufacturing suggested more weakness ahead.

The benchmark Shanghai Composite Index finished almost 3 percent lower at 2,774.6 points, its biggest daily loss in more than four months, after trading in a narrow 30-point range for the previous eight sessions.

Hong Kong’s Hang Seng index dropped 2.1 percent, breaking below its 200-day moving average, currently at 23,007, that had largely held firm this year and is now seen as near-term resistance for any bounce.

“We’re now in a down trend for sure, but the dip today seems a little excessive,” said Zhang Qi, an analyst with Haitong Securities in Shanghai. Traders said panic selling by retail investors probably magnified the losses.

Furthermore, preliminary information from HSBC’s flash manufacturing purchasing managers’ index shows that China’s manufacturing growth  for May 2011 is estimated to be at a 10-month low.From CNBC:

China’s factory expansion slowed further in May while price pressures eased, a survey showed on Monday, reinforcing signs that the economy is responding to a slew of monetary tightening steps aimed at taming inflation.

The HSBC flash manufacturing purchasing managers’ index (PMI), the earliest available indicator of China’s industrial activity, eased to 51.1 in May, the lowest since July 2010.

That compares with a reading of 51.8 in April. A figure above 50 points to expansion on the month.

“Manufacturers continued to reduce inventories amidst slowing new business flows, leading to slower production growth at a 10-month low,” said Qu Hongbin, chief China economist at HSBC.

Still, there is no need to worry about a hard landing in China because the current PMI still indicated about 13 percent growth in industrial output and 9 percent growth in GDP, Qu said.

“Policy focus is still tilted towards taming inflation. We expect Beijing’s tightening policy will continue in coming months,” he said.


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