The data behind the nascent China recovery

For the last few weeks I have been talking about the nascent China recovery. It’s not your 2009 China recovery – but it’s definitely enough to take prices higher.

Image courtesy Philippe Semanaz: http://www.flickr.com/photos/philippe/

Industry is picking up in Kunming, Yunnan, China

There was a slew of other data that was stronger on trend if not outright strong:

  • Last night China reported GDP of 7.4% vs. the Bloomberg estimate of 7.4%.
  • Overall it grew 2.2% in the quarter vs. estimates of 2%.  
  • Industrial production grew 9.2% vs. estimates of 9%, and retail sales were 14.2% vs. estimates of 13.2%

On the back of that, the Hang Seng China Enterprises Index (HSCEI) posted another 1.38% gain last night, which was a powerful move through the 200 day moving average.                                               

To continue the China recovery conversation, there is lots of momentum in the coal, ore and steel spaces in the market with some real fundamentals sprinkled in. 

You may have seen that AK Steel (AKS, quote) raised steel prices yesterday. Other U.S. steel companies raised prices the day before. Also the China rotation is taking on a real dimension. There are quite a few bullish notes on a China recovery making the rounds, including from Morgan Stanley and Credit Suisse over the last couple of days. They all have the same talking points: iron ore inventories, Korea and Taiwan data and even BHP Billiton’s (BHP, quote) bullish comments concerning positioning.

Iron ore inventory levels at ports in China are falling.

Brokers are seeing flow on their desks as well in global macro from buyers of the iShares MSCI Emerging Markets Index ETF (EEM, quote) and the iShares FTSE China 25 Index ETF (FXI, quotes) in cash and upside calls.

FXI is sporting its highest Relative Strength Indicator (RSI) in two years, but it should still be ok when you consider all the short interest in this name. Just unwinding alone will help.

Morgan Stanley highlights FXI’s move higher of 8% over the past month. Over the past three years there have only been three monthly periods that saw stronger gains.

Mainland China economist:

“Now we are seeing an increasing amount of evidences for green shoots. This evidence comes from a wide range of sectors including transportation, commodity, exports, property market, credit and money data, tourism in Golden Week and restocking by manufacturing companies. To be sure, we believe it might take another couple of quarters for growth to significantly recover. However, we believe the risk for a hard landing is getting increasingly smaller, we at least could be confident to expect stabilization, and we even see some upside risk to our growth outlook (7.6% in both 2012 and 2013).”

In a statement yesterday Chinese Premier Wen Jiabao said the economy has started to stabilize and that China’s economic situation is “relatively good,” Xinhua News Agency reported. 

My firm is choosing to play the China recovery via the miners most reliant on Chinese demand and restocking. We’ve talked about them before:

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