News & Analysis » China

China`s GDP to outpace world again

The Shanghai Composite Index continues to give the world jitters. Several news sources are now fretting that a "bear market" in China means trouble for the whole world. Of course that's not the case. China is on a world-beating growth trajectory

Keep in mind, the Shanghai Composite Index (SCI) has now enjoyed two days of upward movement after suffering some sharp declines. As a leading indicator of economic expectations, the SCI jumped by a spectacular 90% from its lows last year, before undergoing a painful correction in the past few weeks. The steepness of this correction did pull back on the performance of some China Stock Digest ADRs.

But the outlook for the Chinese economy remains the best in the world. A government think tank has just disclosed its latest prediction for the third quarter of the year. The outlook would make any western nation envious. The State Information Center says China's gross domestic product will grow about 8.5 percent in the third quarter from a year earlier. That's well up from the second quarter's 7.9 percent pace.

But the Associated Press and USA Today are still circulating anxious stories that China's stock market correction is a gloomy leading indicator for the world economy. As one source put it, " if investors in China - the strongest major economy - were dumping shares and losing confidence, then prospects for other markets and economies were dim."

While it is novel to see some acknowledgement of China's important role in the global economy, the idea that the Chinese stock market could signal world economic performance is ludicrous and should be ignored.

As we have noted in previous postings, the rise of China's internal markets is due in part to a flood of money released by Chinese banks on government orders. There is speculation that this torrent of money may be reined in. Chinese shares do not reflect global valuations because they are not tradable by foreigners. Shanghai was due for a correction due to severe over-valuation compared to ADRs and Hong Kong stocks.

None of these factors weigh on the global economic outlook. Nor do they reflect the real-world performance of Chinese companies.

The SIC says the Chinese economy has bottomed out, but as strong as it is, the economy is still growing below potential, mainly due to weak exports. Exports will fall 20 percent in the third quarter, compared with a year earlier, with imports dropping 12.7 percent, according to the think tank's forecast.

The SIC outlook does highlight some concerns. Capital spending will remain a key driver for China's economy, and urban fixed-asset investment is likely to rise 32 percent in the third quarter. Such heavy capital investment will worsen many deep-rooted problems, including over-capacity.

The SIC highlights the steel-making and cement sectors as suffering from serious over-capacity. Obviously these are investment areas to avoid.

Over investment may also cause inflationary bubbles in sectors such as real estate. However the Chinese economy as a whole remains remarkably free of inflation worries. The SIC says, "China's CPI has been falling for many months, and it's a fact that mild deflation exists."  The agency forecast that the Consumer Price Index will drop by 1.3 percent this quarter from a year earlier, and the producer price index will decline 7.9 percent.

The freewheeling printing of money in the United States indicates a stronger danger of inflation on this side of the Pacific than in China.

Free Copy of China's Top Green Energy Stocks For The Year Ahead:
http://tinyurl.com/m83dr2

Jim Trippon
Editor
China Stock Digest
www.chinastockdigest.com