JPMorgan Chase & Co. advised cutting Chinese stock holdings and betting against the nation’s biggest banks as economic growth slows and inflation quickens.
The largest U.S. lender by assets downgraded China to underweight and recommended bearish derivatives tied to the country’s four biggest banks, Adrian Mowat, JPMorgan’s chief Asia and emerging-market strategist, wrote in a report today. Mowat had a neutral position on China in a Feb. 20 note.
“Growth momentum is now slowing with policy response constrained; a nasty combination,” Mowat wrote.
China’s industrial output had the weakest start to a year since 2009, retail sales growth slowed and inflation exceeded projections. A government report today showed new home prices posted the broadest advance since December 2011, challenging Premier Li Keqiang’s efforts to prevent a real estate bubble. Rapid credit growth, elevated property prices and a decline in potential growth have increased risks of a financial crisis in China, Nomura Holdings Inc. said in a March 15 report.
The Hang Seng China Enterprises Index (HSCEI), the benchmark gauge for mainland companies listed in Hong Kong, tumbled 2.3 percent at the mid-day trading break for the biggest drop among Asian equity indexes. Industrial & Commercial Bank of China Ltd., the country’s biggest lender by market value, dropped 3 percent.
Chinese policy makers will probably tighten liquidity this year to curb inflation, Katherine Lei, an analyst at JPMorgan, wrote in a separate report dated yesterday. The proliferation of non-bank financing makes it difficult to determine the scale and timing of government measures to reign in credit growth, creating additional “uncertainty,” Lei wrote.
JPMorgan recommended put options or short positions in total return swaps linked to Chinese banks for investors who share the firm’s pessimistic view on the industry.
The bearish outlook contrasts with that of HSBC Holdings Plc, which said on March 10 that China’s central bank will probably keep monetary policy “relatively accommodative” in coming quarters as “modest” inflation pressure helps support the economic recovery.
China’s industrial production increased 9.9 percent in the first two months of 2013 and retail sales rose 12.3 percent, government data showed March 9, trailing economists’ estimates. New local-currency loans in February fell to 620 billion yuan ($99.6 billion), the People’s Bank of China said, lower than the estimates of 27 out of 28 analysts in a Bloomberg News survey.
Consumer prices climbed 3.2 percent in February from a year earlier, topping the median economist estimate of 3 percent in a Bloomberg News survey. New home prices rose in 62 cities of the 70 the government tracks in February from a year earlier, the National Bureau of Statistics said today.
Zhou Xiaochuan, who was reappointed governor of China’s central bank on March 16, said at a March 13 press conference that policy makers should be on “high alert” over inflation.
The Hang Seng China index is poised to enter a so-called correction after declining more than 10 percent from this year’s closing high on Feb. 1. The gauge has retreated 5.8 percent this year, compared with a 2.2 percent drop in the MSCI Emerging Markets Index.
Mowat said in a Feb. 20 report that developing-nation shares may enter a “significant correction.” The MSCI emerging markets gauge has dropped 3.4 percent since then, versus a 2 percent gain in the MSCI World Index of developed-nation shares.
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