Weakness Or Pause In China’s Economy? (FXI, FXP, VWO, EEM)
Jim Trippon: With the April economic numbers for China (NYSEARCA:FXI) just released, they revived the arguments for the China bears (NYSEARCA:FXP) who believe the economy is in a severe slowdown, still headed for a hard landing. But is this really the case? The measures of factory production, exports and retail sales were all down, so the conclusion by many observers was that China’s economy was slowing down further.
Some of the numbers include an April producer price index (PPI) that dropped 0.7 percent, which follows an 0.3 percent drop in March. Industrial production grew at 9.3 percent, the lowest growth in three years. Loan volume was less than expected, at roughly $108.04 billion instead of the nearly $130 billion estimates called for. Retail sales grew at 14.1 percent, which was the slowest growth in over a year. Fixed investment, which rose at just over 20 percent, showed the lowest level of growth in a decade.
The specter of a wounded eurozone looms over China with the release of recent trade data. Exports, which were expected to grow 8.5 percent, grew 4.9 percent, while imports grew 0.3 percent, far less than the more than 10 percent growth anticipated. China’s export story is highly colored by its large, troubled trading partner, Europe. This was expected, or should have been expected after the two important elections in France and Greece. Yet in China there were some positive signs on the economic front. There was still significant amount of spending by the infrastructure segment, which is led by government or state projects. Also, the trade data on a month-to-month calendar adjusted basis does not appear as weak. This shows 9.4 percent export growth with import growth at 7.3 percent. The year over year adjusted export growth was 7.2 percent while imports grew at an adjusted 4.8 percent. Again, these are better numbers than the recent monthly data on the PPI, and perhaps give some context or better context to some of the other data.
What About Inflation?
April inflation data was down to 3.4 percent, following the 3.6 percent in March. Food inflation was 7 percent in April compared to 7.5 percent in March. Food is a large measure of the Chinese CPI so food inflation is a concern. China’s inflation rate has been falling from its 6.5 percent last July, which was achieved by both policy tightening on interest rates, then additionally when the economy began to markedly slow last fall. Although the government has started to implement gradual policy measures to ease in the face of falling inflation and the economic slowdown, with GDP for the full year 2011 ending at 8.9 percent, there is still debate among China observers as to what and how much needs to be or will be done by Beijing.
China did two separate moves which lowered banking reserve ratio requirements, or RRR, by 100 basis points already, from 21.5 percent to 20.5 percent, and analysts feel another 150 basis points in cuts will be coming. Loan volume and money supply were supposed to be increased, with a target rate for M2 money supply growth pegged at 14 percent. Money supply growth dipped to 12.8 percent in April, so there is the possibility more easing will occur on several fronts. No benchmark interest rate cuts are forecast, as Beijing through the People’s Bank of China, its central bank, has been more concerned about a resumption of overheated growth and inflation rather than the slowdown. And therein lies the difference between how policymakers see the domestic scene as opposed to investors and analysts abroad: ultimately too much growth too fast is still the big worry, not a severe slowdown and a hard landing.
A Pause In Recovery
Near term the data shows slowing, but it is more a pause than a severe trend toward long term or even medium term weakness. Beijing has been cooling off its once-torrid property sector and is trying to rebalance its economy toward more consumer spending. Although demand and retail figures are temporarily off, these should pick up as the year goes on when Chinese domestic demand for consumer goods and services such as smartphones and the internet shows ongoing strength, as well as more activity on hard goods such as appliances and autos. GDP should still be 7 percent to 8 percent for the year. China’s got a long way to go to rebalance its economy, of course, but it is far from weak in the growth department even with the slowdown.
Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Index (NYSEARCA:EEM).
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.
This information was brought to you by GlobalProfitsAlert.com, a publication of Trippon Financial Research, Inc. GlobalProfitsAlert.com publishes information on Investing in the China stock market and emerging markets, dividend stock and income investing, exchange traded funds (ETFs), green energy stocks, technology stocks, global market trends and other investment information. To view archives or subscribe, visit www.globalprofitsalert.com.