Secondly, administrative lending guidance to the state-run banks has been relaxed and helps to explain a firmer tone to investment growth. The more reliable indicators have activity, such as imports and electricity output, also point to a rebound in Chinese growth.
Although the US drives changes in Chinese growth, domestically-determined secular forces are still extremely important in determining absolute growth. Consistent with an expanding work force, higher wage growth and the emergence of a urban consuming class, retail sales growth has remained in double digit territory. Investment growth remains in the region of 25-30 per cent this likely to continue as long as there is a need to build infrastructure and as China transitions from a rural to an industrial economy.
The ex-China Asian data has been mixed, with countries like Korea starting to see signs of a rebound in activity but others remaining stable in terms of growth. The result is that Asian export growth has only stabilised – but still at only slightly below normal levels. Production, however, has shown signs of revival, where a growth rate of around 5 per cent is around the long-term trend. Employment has continued to grow, and unemployment rates are either stable or falling. These labour market conditions have continued to support retail sales, which have improved, following the deceleration seen last year.
Therefore, the overall outlook is for regional activity to rebound into the final part of the year and GDP growth is likely to be only moderately below trend overall. Such growth will help to sustain corporate earnings, which is set to decelerate from a super-normal 30 per cent year on year last year to a trend rate of around 10 per cent per annum into 2006. This would be in line with analysts’ expectations, leaving equity valuations for Asia ex-Japan still cheap compared with the other major markets. Moreover, although the market has outperformed, it still offers a premium of around 2 per cent per annum over other major international markets. Short-term, Asian equities may need to consolidate but longer-term they are still price to outperform.
Nigel Richardson is chief investment officer at Axa Investment Managers Asia.
