China ‘Struggling’ on Weak Exports, Oppenheimer Says

By Allen Wan and Veronica Navarro Espinosa

May 19 (Bloomberg) -- China’s economy is “struggling” and may fall short of the government’s 8 percent growth forecast this year as export demand slumps, said Katherine Lu, director of China equity research at Oppenheimer & Co.

“The 8 percent target will be hard,” Lu said in an interview at an investment conference in New York. “Even though the economic stimulus is helping, export demand is still weak.”

China’s government removed lending restrictions and unveiled a 4 trillion yuan ($586 billion) stimulus package in November to shore up growth amid a global recession that has choked export demand. The world’s third-biggest economy expanded 6.1 percent in the first quarter, the slowest pace in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier, the customs bureau said last week.

“The economy is struggling,” Lu said. “The biggest concern is export demand.”

Xu Lin, director general of China’s department of fiscal and financial affairs at the National Development and Reform Commission, said yesterday the economy can “definitely” reach its 8 percent growth forecast this year. Gross domestic product may expand 7.8 percent in 2009, according to the median forecast of 10 economists surveyed by Bloomberg.

Stock Market Rally

The Shanghai Composite Index has surged 47 percent this year on optimism the stimulus plan and record bank lending will spur growth. The rally prompted JPMorgan Chase & Co. to cut the country’s equities yesterday to “neutral” from “overweight.” The measure rose for a third day, adding 1 percent to 2,678.93 as of 9:49 a.m. in Shanghai.

“As China discounts its economic recovery, we are reallocating capital to other North Asian economies that are later in the recovery phase,” the JPMorgan analysts wrote.

The outlook for mainland stocks is bullish even as growth falls short of projections, Oppenheimer’s Lu said.

“Valuations are still close to historical lows,” Lu said. “Investors are pricing in a year-end rebound.”

The Shanghai Composite Index trades at 26.7 times the reported earnings of its companies, compared with about 28 times a year ago and almost 49 times in October 2007.

Hao Hong, a New York-based analyst with Brean Murray Carret & Co., said equities may sustain gains because the money supply is swelling after the central bank lowered interest rates five times in the final four months of last year. Money supply rose by a record 26 percent in April, the bank said last week.

“I’m not as bullish on the economy,” said Hong. “Less than 25 percent of the stimulus package is new spending.”

To contact the reporters on this story: Veronica Espinosa in New York at vespinosa@bloomberg.net; Allen Wan in New York at awan3@bloomberg.net