Will China Steer A Soft Landing? (FXI, FXP, TAO, VWO, EEM)
Jim Trippon: With China’s GDP slowing unexpectedly according to recent figures, some observers are wondering if its usually red hot economy may now be headed for a hard landing or not. China’s National Bureau of Statistics released data that showed China’s GDP grew 9.1 percent year over year for its third quarter, less than the 9.3 percent median figure predicted in a Bloomberg News survey. The GDP had expanded 9.5 percent in the second quarter while GDP growth was 9.7 in percent in the first quarter of this year.
China GDP Growth
While the slower growth was the goal of China’s government, according to Lian Ping, chief economist with the Bank of Communications, cited in a China Daily article, now the concern in some quarters is if growth is slowing too much. The government has been trying to hold down inflation mostly by interest rate hikes to slow the rise in surging property prices. China has raised its benchmark rates on one-year borrowing costs to 6.56 percent in an attempt to drive inflation down to 4 percent. The inflation rate has fallen, but prices still climbed 6.1 percent in September, exceeding the target rate of 4 percent.
Euro Demand Down
Although China is still battling inflation, it may at least be temporarily done with rate hikes. The falling demand in Europe due to the debt crisis is weakening that major market for Chinese exports. China’s internal spending has supported its domestic growth even as the global economy continues to show signs of slowing. Consumer spending has been more robust, with a 17.7 percent gain in September following a similar gain in August. Inflation has had a different effect on China’s populace than it would in the west, particularly in the US. With a greater savings rate, inflation has meant more money for both investing and spending, so thus the healthy growth in consumer spending.
Although China is still an export driven and trade dependent economy, with 27 percent of its GDP accounted for by exports in 2010, many observers see China’s growing consumer economy as eventually changing the mix. China’s fixed asset investments, those for property, plants and equipment, was up 24.9 percent in the first three-quarters of the year. Investment in real property is still running high, with a 32 percent year over year increase, while investment in residential property was up 35 percent. Industrial value added output, a key mark of industrial production, rose 14.2 percent in the first three quarters of the year.
Growth Still There
Despite the slowing of Europe’s economy and the global economy as well, China’s growth, while slower, is still substantial. Anything near the 9 percent annual figure still dwarfs the growth rates of the mature economies in the west. Still, the world’s financial markets have been used to continued rising growth in China, so the markets reacted. The Shanghai composite index dropped 2.3 percent on the news of China’s slower growth while other Asian markets followed suit. Near and medium term there are still many factors to consider as to how China’s economic growth situation will play out. There is debate about how much growth China will continue to enjoy as well as debate about how China’s government will react to those results as well as to changing economic conditions.
Construction In Wuhan, Hubei Province
While we’ve seen estimates for GDP growth going forward in China ranging from 8.5 percent to around 9 percent, the question is how will the country respond? Yao Wei, economist at Societe General SA (OTC: SCGLY), said in a Bloomberg piece that the next move might be easing, though not in the near term. On the other hand, Shanghai Securities’ strategist Tu Jun said that China’s central bank was likely to keep to a tight monetary policy, with interest rate hikes resuming by the middle of next year. China central bank advisor Xia Bin said the economy doesn’t need any major stimulus, and that the central bank should stick with a policy he calls, “prudent.”
What’s Likely To Happen
China most likely will keep a close rein on things, though it has to watch carefully, as there are both inflationary aspects and areas of its economy that may need a boost. There is still concern with the property situation with its potential for further inflation, though the government has been encouraging behind the scenes increases in loan reserves by the banks. The consumer spending will also help buoy growth in what looks to be the absence of dramatic trade growth for now. Small and medium enterprises are going to need easier credit and the government is trying to move in that direction. Of course if the European situation deteriorates to the point of more severely clouding global growth, China’s landing could be harder. But the PRC has plenty of reserves to fight off a downturn, so it’s likely to get the stable growth it’s after.
Related: China Real Estate ETF (NYSE:TAO), iShares FTSE China 25 Index Fund (NYSE:FXI), ProShares UltraShort FTSE China 25 ETF (NYSE:FXP), iShares MSCI Emerging Markets Index (NYSE:EEM), Vanguard MSCI Emerging Markets ETF (NYSE:VWO).
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Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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