China’s Economy Ready To Turn Positive (FXI, FXP, EEM, VWO)
Jim Trippon: Investors in China are of course paying close attention and are strongly interested in both the near term and long term direction of China’s economy. Most of the news from the western financial media has painted a negative picture of China recently, as the shouting about slower growth has grown louder. The surprisingly disappointing economic numbers in April reinforced the view that China’s economic growth, as its critics maintain, is headed for still slower velocity as the year goes on. We disagree, however, and think this is a misreading of the signals.
While the April data was admittedly weaker, and the scattered May data that’s emerging is not that encouraging as well, as according to preliminary reports, net bank lending produced almost no gains by the big banks, this won’t necessarily be the whole story. In addition to the sluggish loan picture, the well-known litany of the bears’ case on China has been a recitation of the woes of the troubled property sector, the falloff on the export trade due to the continued weakening of its European partners, and the lackluster pickup in the retail sector. All these point to areas of legitimate concern, but that doesn’t mean the deceleration will continue.
Policy Easing To Accelerate
The cooling off of China’s economy, something that in legendary China investor Jim Rogers’ words, “the government of China has been trying to do for three years now,” is in part a product of China’s attempt to slow red-hot growth along with the global economy markedly slowing on its own. China had been increasing its benchmark interest rates up until mid-year last year to cool off the rampant growth and speculation in a too-hot property market. Although collapse had been loudly predicted by various China bears, it hasn’t happened and won’t. Instead, the property market has cooled off. As a sidebar on the property issue, China bears predicted collapse of China’s big banks and perhaps even the entire financial system due to NPLs, or non-performing loans (read: unpaid, defaulted loans), but that hasn’t happened either and likely won’t. Again, to hear Jim Rogers tell it, “the government won’t let that happen because in China, the government is the banks.” In other words, no Lehman Bros. or JP Morgan (NYSE:JPM) type-fiasco would be allowed to significantly wound the whole system. Whatever you think of this ideologically as an investor, it is terribly effective.
A History Of Intervention
During the global crisis of 2008 and 2009, China’s government stepped in with a stimulus that was estimated at $600 billion. If you check the growth figures for GDP in China those years, the growth rate never slipped below 6 percent. The GDP growth rate slipped from roughly 11 percent to 6 percent, then by 2010 had rebounded to over 10 percent. Dare to compare these with US GDP growth rates—which were negative—at the time? Much of the stimulus the PRC initiated was proactive, if not preventive. The takeaway is that it worked. That should be the case this time around in a much less severe downturn.
Gradual, Effective Easing
Chinese policy makers aren’t sitting idly by as the economic slowdown continues. The People’s Bank of China, its central bank, lowered the reserve ratio requirement, or RRR, the capital reserve for the big banks, for a third time on May 12. The 50 basis point lowering comes on the heels of two previous 50 point cuts, which may free up as much as $60 billion additional for lending. Economists predict more RRR cuts, with most expecting anywhere from 50 points to as much as 150 points to be cut through the year. Many economists likewise feel that with this and other measures in place and more to be added, that the economic downturn will be halted. Not all agree, however. Joy Yang, chief Greater China economist at Mirae Asset Securities in Hong Kong, was quoted in a Bloomberg piece as indicating a benchmark interest rate cut would be necessary by July.
Although China’s retail numbers were disappointing in April, the attitudes of Chinese consumers were still largely positive. Some of the spending that consumers had planned was delayed, though savings continued at a brisk pace. China’s consumers will be at the ready to provide a bigger push to the economic engine than previously. With the policy easing continuing and likely to continue wherever and whenever needed in response to slowing growth, Morgan Stanley analyst Jonathan Garner, quoted by Bloomberg, said the “bear phase in equities is likely over.”
Related: 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.
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