China’s Fading Economy

It doesn’t take an analyst to tell you that China’s economy is slowing down. Recent data from the Chinese government puts growth for the most recent quarter at just 7.4%. This is a new record low since the depths of the global economic crisis in 08-09 and is now the sixth quarter of decline in a row. Economists are already concerned with the slowdown but there’s evidence that is could be much worse than what the government is reporting. For several years, there has been widespread speculation that these numbers are erroneous. When other measures of economic output are used, such as energy production, past data has shown that the Chinese government may have reported growth figures that were off by as much as 2%. The possibility of a growth rate of 5% in a country like China is an alarming figure for an economy that is still considered an emerging market. For one, it adds a significant amount of risk to broad based emerging market funds that are invested heavily in the country’s future. We’re expecting gains from funds like these to be lower in the next year and possibly the next several years.

The prospects for a higher growth rate in China’s economy are good but far from great. Diminished exports to the United States and Europe will continue to drag the economy down until we see a significant rebound from the prolonged recoveries in both regions. Additionally, cooperation between the Chinese government and the country’s financial sector seems to be difficult. A recent article featured in BloomburgBusinessweek claims that Chinese banks are reluctant to cut rates in accordance with the government’s plan. However, there is strong hope for the future. Though China’s economy may get stuck in a rut for the next several years, the prospects for growth beyond that timeframe look excellent. Just this year, city and local governments in China have announced infrastructure projects worth more than 19 trillion yuan. This activity will no doubt stimulate the economy but it will also help the country keep up with the needs of businesses and the economy. Historically, it has been shown that strong spending on infrastructure boosts economic growth in the long-term when it’s needed (this has been true in the history of the U.S. economy).

In any case, investors may want to consider avoiding purchasing securities that are heavily weighted in Chinese assets and move assets to other emerging markets that have continued to grow rapidly such as Thailand, Peru, and the Philippines.

 

Citations:

Federal Reserve Bank of Dallas: “China’s Slowdown May Be Worse Than Official Data Suggest”

Bloomberg News: “Chinese Banks Resist Call to Cut Rates as Economy Slows”

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