China: feeding the animals

China bears are getting fat dining on headlines; but details feed the bulls.

On Monday, China announced weak trade data. March exports fell a jarring 15 per cent year on year, when a solid increase was expected; imports dropped 12 per cent, a shade worse than hoped. Sceptics could only shake their heads as mainland China 'A' and Hong Kong 'H' share indices shrugged and continued their ascent. The explanation is familiar. China has made clear its intention to keep its economy growing, so weak data and low inflation signal more rate cuts ahead.

A flood of cheap money may be a poor-quality reason to chase stock markets higher. Arguments that China is in bubble territory are increasingly persuasive - even if not all sectors are overvalued (bank shares are the most notable exception).

And yet there are some causes for optimism on the fundamentals - including recent policy inaction. Last week, for instance, prime minister Li Keqiang ruled out short term stimulus measures as the government tries to rebalance the economy. This should be welcome - after all, investors have long decried China's reliance on fixed asset investment.

Consider, too, the possibility that the domestic side of the economy may be improving. Pockets of data indicate that it is. Recent moves by the government to support the property sector may be bearing fruit. Tier one city residential sales for the Qing Ming holiday period (which due to the lunar calendar was not the same date last year) rose over one-third year on year, according to Barclays. Prices rose by 4 per cent week on week - encouraging, given that inventories remain high.

If that is too short to call a trend, the pick up in consumer confidence is more compelling. The Westpac MNI consumer confidence indicator ticked up in March, to the highest level since July last year. Spurring the improved sentiment was a 7.5 per cent increase in the current personal finances indicator, based on income levels. Recent news from Japanese clothing manufacturer Uniqlo that it is raising prices in part due to wage hikes in China lend credence to the data.

The trade figures, too, are not necessarily desperate. A drop of one quarter in the euro since last March will have hit exports; a halving in oil and iron ore prices will have crimped imports. The bulls will keep eating for a little while longer.

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