China playing catch-up!

The National People Congress wrapped up without much fanfare. A reassuring fact is China appointing numerous cadres with rich working experience to take charge of its various ministries. And this will help alleviate numerous complications where national policies are badly enforced at the provincial level due to circumvention of regulations as the thumb of rule of attracting investment inflow to boost employment is their utmost priority.

Former Beijing mayor Wang Qishan, duded the godfather of China stock market will also take charge of the banking and finance portfolio. Mr Wang was instrumental in setting up CICC and also later denying Morgan Stanley a management role in the JV due to MS arrogance and "perceived supremacy". With his vast knowledge,experience in dealing with national crisis such as the SARS crisis and access to the top leaders, he will be the man to look out in steering China red hot economy into calmer waters.

Wen Jiabao reiterated that inflationary pressure is the government immediate concern as run away inflation has escalated to astronomical level. In recent weeks, widespread publicity of the escalating food prices reaching unaffordable levels have allowed some activists to expolit the issue and stir up social unrest. Whatever cooling measures are deployed to cool the red hot economy , China is mindful of the aggressive highhanded measures undertaken in the mid 90s which froze all credit lines, leading to a hard landing and plaguing the economy into recession.

From 25th March onwards, PBOC announced that commercial banks reserve requirement ratio will rise by 50bp to 15.5% in a bid to mop up excess liquidity and there are also increasing chatters of a rate hike soon. In fact the CSRC has also recently announced that property developers looking to the ECM for fund raising will be given increased scrutiny and the existence of a unspoken decree of NO commercial bank loans for all property projects will see property supply being curtailed and a waning demand due to high borrowing costs and whooping price gain over the years. Furthermore, Feburary residential transaction volume has already plunged by 54% m-o-m with signs emerging that the property market will experience more turbulent times ahead.

The global economy outlook is softening and emerging markets are not immune either. Though Chinese industrial production remains high, but growth has been decelerating(15.4% y-o-y in January vs 17.4% y-o-y in December),with exports slowing to 6.5% y-o-y in February.

The picture on the ground is pretty mixed. Plenty of SMEs are shutting down due to a myriad of factors such as the new labor law, high cost of borrowings, escalating raw material environment and stringent environmental regulatory enforcement. Of notable mention is the new labor law that brought about more definite protection to the labor force where a considerable portion of the chinese population are still working under the minimal wage bracket.Little weightage has been given to the new labor law until recently and apparantly a few casualties has emerged with a huge F&B company that is going IPO in HK forking out millions of dollar in their labor dispute settlement.

Large well capitalized firms will be the core beneficiary from the SMEs fallout benefiting from the capacity spillover. Vertically integrated firms with pricing control and access to vital raw materials will be able to outprice their competitors in the current cutthroat business environment buffered by their upstream margins and further advance their market share.

The normalization of China stock and property market, coupled with a tightening credit market where banks lending quota has all been maxed out for the current quarter; increasing trend of credit starved SMEs turning to the PE market for capital infusion and large firms cutting back on their Capital expenditure will definitely see the government tightening measures filtering down to the economic figures in mid or late 08. Meanwhile, fasten your seatbelt for the tough ride ahead.