Business

Tuesday March 24, 2009

Handling the current crisis

Singular Vision - Teoh Kok Lin


Fast, forceful and effective execution of policies will help restore confidence

I just attended an investor conference in Changsha, China. As a fund manager, attending conferences and company visits is what I enjoy most.

Conferences and/or company visits are where you have an opportunity to listen to the latest views of industry experts as well as senior management of public listed companies.

You get to better understand their business strategy, management thinking as well as get an update on the recent developments of their businesses.

I attended this conference to have a better first-hand feel on the economic situation in China, the mood of the investing community as well as to visit Changsha.

Although most people are aware of the global financial crisis, they do genuinely believe that China is recovering and that the country can easily achieve an 8% gross domestic product (GDP) growth for 2009.

This view is almost unanimous, from the man on the street to fund managers and senior management of public-listed companies.

In fact, a recent online survey in China showed that more than 85% of Chinese believe that China can achieve the GDP growth target.

But why 8% GDP growth? This is supposedly the necessary growth required to sustain low unemployment rate and to ensure social stability.

What is more important is that it helps boost investors and consumer confidence.When there is confidence, consumers are likely to continue spending, and be enticed by the numerous incentives by the government to spend more on cars, white goods, properties, etc.

This has been reflected in recent data: China’s vehicle sales surged 25% year-on-year (y-o-y) in February, after the government cut taxes on some models, while China’s retail sales for January-February went up about 15% y-o-y.

Most of the machinery companies participating in the Changsha conference saw sales improve in early 2009 after it plunged in the fourth quarter of 2008 .

This, I attribute, to the fast and forceful implementation of the four trillion yuan stimulus package as well as the fact that business confidence remains high, therefore businesses are willing to commit to capital investments.

The recovery in machinery spending is important, as it is not only an early indicator of the health of the economy, but also forms an important part of China’s GDP growth.

While China’s plummeting exports has been headline-grabbing news, net exports only account for about 9% of China’s 2008 GDP growth.

The bulk of China’s 2008 GDP growth was driven by fixed asset investment (FAI) and consumption, which accounts for 47% and 44% respectively, according to the National Bureau of Statistic.

The positive feedback gathered from the machinery companies was subsequently confirmed with the release of the January-February urban FAI growth of 26.5% y-o-y (urban FAI accounts for 85% of overall FAI).

China’s loan disbursement data has also boosted the confidence of domestic fund managers.

China’s new loans disbursement, which rose from about 477 billion yuan in November to 772 billion yuan in December last year, surged to 1.6 trillion yuan and 1.1 trillion yuan in January and February respectively.

A few of the China-based fund managers I spoke to were optimistic that the recent rally in Chinese stocks could be sustained, as they were backed by good macro economic data.

These fund managers were largely responsible for the performance of China’s domestic share prices this year, which rose 30% and 20% for the Shenzhen and Shanghai stock index (as at March 17) respectively. This in turn should help boost business and consumer confidence.

The distinction between China and the rest of the world in the handling of the crisis was that they acted fast and forcefully while the glass was still half full.

In many parts of the world, governments have spent too much time debating and focusing on their own political agenda until the glass became half empty.

This makes the task of containing the negative spiral (feedback loop) on the economy much more difficult.

Warren Buffett, in a recent CNBC interview, said it right - It is important that opposing sides of the government unite in combating the economic crisis in a fast and forceful manner.

This is not a time to debate on one’s ideology, push for one’s pet projects, or worst, profiteering from the stimulus projects.

This will not instill confidence. Fast, forceful, transparent, and effective implementation of policies will.

A suggestion on transparency: The government should put the progress of the various stimulus measures on the web (with details and frequent updates). This will go a long way in boosting confidence and to help in the recovery of the economy.

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