Investment Strategies

China's Economy Should Start Strongly In 2013 But Glow Could Fade - BoA Merrill Lynch

Tom Burroughes Group Editor 4 January 2013

China's Economy Should Start Strongly In 2013 But Glow Could Fade - BoA Merrill Lynch

Fears that China was headed for a “hard landing” have been erased by the Asian giant’s policymakers although a honeymoon for China’s new leadership may fade by the second half of this year, according to Bank of America Merrill Lynch.

In a research report, the US firm said that debate among investors has now switched to asking how sustainable any Chinese economic growth will be in 2013.

“In this regard, we have a resolute answer. In 2012, the macro environment was anemic to asset prices in the first half but turned increasingly supportive in 2H [second half]. In 2013, we expect exactly the opposite,” it said.

“[The] macro environment could remain supportive of asset prices in 1H, but could turn less supportive or even negative in 2H. Several months ago we spearheaded the street on calling `green shoots’ and revising up growth forecasts. We are still bullish, but we suggest investors to stay alert in times of rally and optimism,” BoA Merrill Lynch continued.

The firm is turning cautious about the second half of this year because gross domestic product and industrial earnings growth may peak in the first six months of 2013 and then cool later on.

“Home prices may rise faster in the spring of 2013 and trigger a new round of concern on stricter tightening in [second half]. The current honeymoon with China's new leaders and the high expectations on structural reforms could be cooled down after spring time,” it said.

“Finally, perpetual China bears will likely launch a counterattack in mid-2012 when growth peaks and inflation rises, with focus on favourite issues such as shadow banking, government debt, over-investment and property bubbles,” it continued. 

The bank argued that the recently installed new Chinese leadership – chosen by the Communist Party Congress late last year – could set a GDP growth target of 7.5 per cent for 2013, as well as a 3.5 per cent consumer price inflation target and a 13 per cent M2 money supply growth target.

“Policy will remain supportive of growth, but will be marginally tightened towards end-2013 on concerns of rising inflation, rising home prices and financial system risks. New leaders like neither big slowdown nor overheating. Beijing is unlikely to be too aggressive in stimulus in 2013, so investors should be wary of the sell-side's ratcheting up of growth forecasts,” it added.

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