China's Stock Investors Should Wait for Commodities Slump, JPMorgan Says
China’s equity investors must wait for a 40 percent tumble in commodities prices as a signal to reenter Asia’s worst-performing market of the year, according to JPMorgan Chase & Co.
A plunge in raw material prices will show that tightening measures by the government to avoid “the risk of developing an inflation problem” have worked, said Adrian Mowat, the chief Asian and emerging-market strategist at JPMorgan Chase, which has an “underweight” rating on China.
“So what we will like to see in China is further tightening measures in order to reduce fixed asset investment growth,” curbing real estate and infrastructure construction and commodities, Mowat said in a Bloomberg Television interview today. “Once we see that slowdown, I think the Chinese equities market will be a buy again.”
The benchmark Shanghai Composite Index slumped to a eight- month low on concern a European debt crisis and Chinese government curbs on property will hurt economic growth. The gauge has lost 16 percent this year as the government introduced measures to prevent a housing bubble inflated by record lending in 2009, when the gauge surged 80 percent.
The government last month imposed a ban on loans for third- home purchases and raised mortgage rates and down-payment requirements for second-home purchases to curb housing prices, which rose at a record pace in March.
The main issue in China is “too much growth,” Mowat said.
Investor Marc Faber said April 21 that China’s credit expansion and surging real-estate prices are danger signals and “there are some symptoms of a bubble building.” He said in an interview with Bloomberg Television May 3 that the economy will slow and possibly “crash” within nine to 12 months.
China’s central bank ordered lenders over the weekend to set aside more deposits as reserves for a third time in 2010. Vice Housing Minister Qiu Baoxing said the nation must act to curb the formation of asset bubbles, according to a statement posted to the Web site of the Ministry of Housing and Urban- Rural Development.
Premier Wen Jiabao’s government is aiming to slow credit growth to 7.5 trillion yuan ($1.4 trillion) this year from a record 9.59 trillion yuan in 2009. In the first three months of 2010, banks lent 35 percent of the full-year target.
“What the market wants to see, I think, is maybe tax on owning property, a lower loan growth target,” said Mowat. The current target implies about 20 percent loan growth for the balance of the year, he said. “Even with 13 percent nominal growth, that’s still very accommodated.”
The government has staked its “credibility in economic management” on measures to cool the property market, Credit Suisse Group AG said on April 29.
Fueled by a $586 billion stimulus package and $1.4 trillion of new loans last year, property prices jumped 11.7 percent in March across 70 cities from a year earlier, the most since data began in 2005.
China appears heading for an “asset boom, bubble and bust” that probably won’t be thwarted by tighter economic policy, Citigroup Inc. economists said in a March report. It may take as long as two years for the bubble to form and at least three years for it to burst, London-based Willem Buiter, a former Bank of England policy maker, and Shen Minggao in Hong Kong estimated.
To contact the reporter on this story: Weiyi Lim in Taipei at Wlim26@bloomberg.net