China Works blog: China manufacturing news, analysis and insights

Analyst talk in China currently surrounds the flood of new bank loans in recent months that have released a surfeit of liquidity into the economy. This cash is, it seems apparent, being used for speculative investments in two key areas: real estate and stocks – and the result could be a rise in inflation later in the year.

At first glance, these two emerging investment bubbles seem unrelated, but closer analysis reveals an intrinsic link – and that link is China’s large-scale state-funded stimulus spending in new infrastructure and construction projects.

Take, for example, this week’s two mega-IPOs. China State Construction launched the world’s largest IPO for 16 months, while cement maker BBMG saw its shares rise a whopping 65 per cent on its debut day of trading. Neither result occurred in isolation.

While a large proportion of stock buys in both IPOs can be attributed to investors driven by short-term profit gain, it is clear that serious investors believe that Chinese construction/infrastructure-based companies offer long-term value, particularly in the current economic climate. This is a turnaround from the IPOs of two/three years ago, where Chinese banking and financial companies were the boom stock investment vehicles.

For manufacturers, the drip-down conclusion is clear – companies producing goods for China’s construction and real estate development sectors could well be the gainers from these newly cashed-up listed companies – who will seek to reinvest significant parts of their IPO funds into mid-term business growth.

The ongoing bad news for Chinese exporters continued in June. New figures from the Chinese General Administration of Customs show that total exports fell 21.4 per cent year on year in June, to USD95.41 bn. China’s June imports totalled USD87.16 bn, down 13.2 per cent year on the same 2008 period.

During the first half of 2009, Chinese exports were valued at USD521.53 bn – a decrease of 21.8 per cent over the same 2008 period. Imports were valued at USD424.59 bn, down 25.4 per cent. China’s trade surplus stood at USD96.94 bn at the end of June, down USD1.3 bn, or 1.3 per cent, year on year.

Cuts in export tariffs and a rise in tax rebates on some labour-intensive products, including farm and textile products, “slowed the decline in exports of such goods to 21.8 per cent in the first half,” Chinese state media writes. Exports of textiles and garments were down 8.5 per cent year on year between January and June.

The European Union was China’s leading first half year trade partner, followed by the United States and Japan.

China’s first two IPOs in ten months debuted on the Shenzhen Stock Exchange, a sign that shares are being used to mop up inflationary liquidity in the Chinese economy.

China suspended all IPOs last September following continued falls on its two stock exchanges, Shenzhen and Shanghai. The state-run regulator decides which companies can list and the date of their listing. Reuters argues that “this kind of heavy-handed approach emboldens speculators as they believe the government will not allow the IPOs to fall below their offering prices.” Hence, the two companies that listed on Friday, a Guilin pharmaceutical manufacturer and a Zhejiang-based cablemaker, both produced impressive first day share gains.

Next to list will be China’s largest home builder China State Construction Engineering Corp, as the government seeks to use share listings to drain liquidity from the market, after a June surge in bank lending raised fears over the risk of bad loans, asset-price bubbles – and inflation.

This article – http://www.bizchina-update.com/content/view/2411/44/ -explains why, in the short term, Chinese government credit expansion has poured low-cost, free-flowing capital to government-supported projects and had a positive effect on mainly state-sector investment. This may go a long way to helping China achieve its stated goal of an eight per cent GDP growth rate in 2009.

Growth in the Chinese manufacturing sector was recorded for the third successive month in June, according to the headline CLSA China Manufacturing PMI, which rose to 51.8, from 51.2 in the previous month, “its highest level since July 2008.”

The June CLSA Index also reveals that production levels at Chinese manufacturers increased for the third successive month, “largely reflecting gains in new business and an improvement in economic sentiment.”

Output growth was “solid, and the strongest for a year,” while June “was the third straight month in which firms’ order books have improved, following a period of contraction that lasted eight months.” Manufacturing employment “posted a marginal rise,” following stagnation in the previous month.

CLSA add that: “There were widespread reports that rising output requirements and new order volumes had encouraged firms to take on additional workers.”