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Slowdown, So What? Chinese Consumers Remain Upbeat

Despite recent data suggesting that China’s economy is cooling faster than economists expected, one analyst says consumer sentiment in the world’s second biggest economy remains strong, which will in turn boost domestic industrial and consumer stocks.

David Riedel, President of Hong Kong-based Riedel Research Group, told CNBC Asia’s “The Call” that sentiment among Chinese consumers is being supported by increased confidence that the government’s easing policies will prevent a hard landing for the economy.

He referred to the recently released June reading of the MNI Consumer Sentiment Index, a survey which polls over a thousand households across thirty cities in China , which jumped to 101.6 in the month — a level associated with "exuberance" — from May's "panic" level of 90.4. It was the biggest monthly jump in the survey's history, as the effects of the mid-west riots in May faded.

"This is a pretty big rebound from a very weak May, so there's some of that in here. But we are back to above average readings...outlook for real estate prices, intent to purchase automobiles, employment expectations (are) very high,' Riedel said on Tuesday.

China's central bank slashed interest rates for the second time in a month last Thursday, ahead of a busy week of economic data which included inflation, trade and GDP figures — a move market watchers interpret as Beijing getting serious about bolstering the economy by lowering borrowing costs for businesses and lifting private-sector investment.

"I think the reality is that people are becoming convinced that government policy is having the desired effect and that they are engineering this long-waited moderation or slowdown of the economy, not a meltdown, but a slowdown of the economy and I think people appreciate that.”

Riedel believes industrial stocks like Hong Kong-listed China Communications Construction, Weichai Power Company and U.S.-listed China Yuchai International stand to benefit as changes in consumer sentiment is closely linked to the levels of industrial production.

"CSI acts as a leading indicator for industrial production and is highly correlated with the change in industrial production over the next three months," Riedel said in a recent report.

The improving consumer sentiment will support spending and bolster consumer stocks, he added. Riedel recommends Hong-Kong listed retail stocks like Parkson Department Store, Lianhua Supermarket and hypermart Sun Art Retail, which have been beaten down in the last few months.

"Anything consumer related I'd start building positions now," he said.

By CNBC’s Gail Krishnan

Contact Asia Economy

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