Investor sentiment towards China has deteriorated in the last two months.It began with fears of a spillover of the European debt crisis, but has since been driven by chatter about weak domestic demand, financial stress in small and medium enterprises, and falling prices in the property sector.
In a new note, Deutsche Bank analyst Jun Ma says it expects GDP growth to decelerate to about 7% in the coming quarters. It also thinks the MSCI China index faces a 10% – 15% downside risk, before it makes a comeback.
Jun Ma expects sequential GDP growth to decline over the next two quarters. GDP growth is expected to slow rapidly to 7% or below in Q1 2012 at a seasonally adjusted annual rate, from 9% in Q2 2011. A crash to 5% however is very unlikely.
Chinese factory activity picked up for a second straight month in September, with export orders jumping to 50.9 from 48.3 in August. But Ma thinks further decline in export orders will be the biggest threat to the economy in coming quarters.
S&P recently released a report saying Chinese property developers could face increasing liquidity pressure in the next six months. But Ma is worried that physical property prices could decline by 10% in the next 4 - 6 months.
Ma thinks the decline in commodity prices will continue to weigh on earnings and drive a reduction of inventories in energies and raw materials.
Headline PMI in China rose to 51.2 in September. Ma argues that small business stress is also best measured by PMI, and China's stands at 45, which, in sub-50 territory is not good but it is off its reading of 38 in 2008.
While consumer spending on education, health, supermarkets is expected to be strong. Discretionary spending like Macau gaming (Macau stocks were hammered today), travel, dining out, and apparel is expected to be hit in a downturn, according to Ma.
Ma expects to more downside risks to MSCI China even from current levels. '...We believe the market has priced in a mild recession in the EU/US, but a deeper recession in Europe is increasingly likely. This global outlook, as well as falling China export orders, commodities prices, physical properties prices and inventory demand, imply another 10-15% downside to MSCI China.'