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China drives stock markets crazy

By Jim Trippon

Global stock markets fell into a swoon as China announced stellar new growth figures. As we predicted, fourth quarter growth hit double digits, coming in at a slightly better than expected 10.7 percent – the fastest rate of economic expansion since 2007.

The economic numbers released in Beijing contain almost entirely good news for investors. But China’s blazing growth has been blamed for market declines in Asia, Europe and the U.S.  Shanghai was one of the few exceptions, as China’s main stock market gained slightly on the news.

Does it make any sense to blame China’s success for market declines elsewhere? Not much.

The theory we’re hearing from talking heads on TV and print pundits is that China’s soaring growth will spark a tightening of monetary policy by Beijing. That much is likely true. Inflation is at almost two percent in China and increased interest rates and higher bank reserve ratios are pretty much a certainty.

But why would non-Chinese stock markets take a hit because of double-digit expansion and probable monetary tightening in China? After all, China’s robust GDP expansion was widely predicted within 0.2 percent of the final number days earlier. Monetary tightening in China is already underway and more clampdowns on excess lending were predicted weeks ago by the China Stock Digest, and were widely anticipated in the popular press over the past week.

In other words, the announcement of China’s world-beating growth was already baked into stock prices.

One of the few sectors that will feel the effects worldwide of a Chinese clampdown on lending may be the commodity sector. Beijing will probably rein in new loans to heavy industries that are overbuilt, including the steel industry. But a future reduction in demand for some resources can’t be blamed for a market-wide meltdown, especially in the U.S.  A more probable cause of the market plunge in New York is President Obama’s decision to clamp down on the size of  US banks and on the kind of risks they can take.

For the record, the news from China was very positive on many fronts.

Retail sales rose 16.9 percent last year. That gain was the biggest since 1986. Sales jumped even more in December on a year-over-year basis, climbing 17.5 percent.

Industrial production increased at a pace of 18.5 percent. Urban fixed-asset investment jumped 30.5 percent in 2009.

China has staged a clear “V-shaped” recovery according to the National Bureau of Statistics.

China will be the “world’s biggest engine of growth” according to Bloomberg. The World Bank raised its forecast for global expansion in 2010 to 2.7 percent from 2 percent last June. The bank predicts 9 percent growth in China during 2010. The only cloud on the horizon is the widely expected arrival of moderate inflation.

Many China-based ADRs have been rattled by the media panic over monetary tightening in China. The market’s fear is that businesses in general will suffer from tight money policies.

But Beijing has no interest in putting the squeeze on the entire economy. China’s leaders have said repeatedly that their target has been “reasonably fast” economic growth with a target of approximately eight percent expansion.

Beijing hit the bull’s-eye with an average of 8.7 percent growth for all of 2009.

By hitting the brakes on some parts of the economy, China can easily deliver another year of world-beating growth in the eight percent range without risking runaway expansion and overheating.

Jim Trippon,
China Stock Digest Editor-in-chief