The latest economic indicators out of China – the world’s 3rd largest economy have been pointing to a pronounced slowdown in economic output. As a result of this slowdown, the main equity indices in the country have been dropping during the last year, accumulating YTD losses of around 20% and around 40% over the last 3 years – a level that generally gets bargain hunters twitching as we saw with the Spanish and Italian markets just several weeks ago and that have since staged some impressive rallies. Million dollar question – is the bear run in China set to continue or are we now near the bottom?
Red – S&P 500, green – SZSE component, brown – SSE composite, blue – CSI 300
The latest GDP numbers, although but a pipe dream for Western economies, with 7.6% growth, came in below government expectations and much worse than the stellar 10%+ growth rates posted by the economy over the last few years. Fixed asset investment is growing only at the second worst pace since December 2002, industrial production is slowing and manufacturing PMI showing a contraction as exports rose a dismal 1% from one year ago.
With the European Union struggling to gain any economic traction, demand for Chinese products is muted and so pressuring the Chinese authorities to stimulate internal demand. The central bank has cut its lending and deposit rates twice this year and also lowered the amount of funds that banks must keep in reserve (thus freeing up capital for onward lending). CPI numbers have also dropped since the beginning of the year, coming in at just 2% in August and so allowing the potential for further monetary easing. The Chinese Government and the central bank are both concerned with the lacklustre housing market and so additional fiscal intervention could follow too.
While the Chinese picture presently seems grey, the truth is, the economy averaged an annual growth of 9.4% since 1970 while the world grew at just 3.1%, the European Union at 2.3% and the US at 2.8%. Industrial production may not be at the desired levels but it is still delivering a very healthy 8.9% growth rate and GDP growth is more than three times better than in the US. In the US, growth has been slow, manufacturing data has just recently been hinting at contraction while the all important jobs market still isn’t recovering as desired (much to Mr Obama’s chagrin). Under such a scenario it is legitimate to ask just why has the S&P 500 risen 20% over the last year while the main Chinese indices are down 20%? Is such a gap justifiable or are Chinese equities due a rally?
We cover this subject in more depth in the forthcoming edition of Spreadbet Magazine (due out a week on Friday). Stay tuned and make sure you subscribe to be ahead of the pack!