The two most profound changes our generation has been witness to is the advent of the Internet and the explosive growth of the Chinese economy.
Before the Chinese government introduced economic growth reforms in 1979, the average annual real gross domestic product (GDP) growth rate in China was estimated at 5.3% (from 1960 to 1978). Since then, the Chinese economy has maintained consistent and rapid development, with its annual GDP growth averaging 9.3% between 1978 and 2001. (Source: “China’s Contribution to Global Economy,” China Consulate web site, May 22, 2004.)
According to the World Bank, in terms of stabilized prices, the rate of China’s contribution to global economic growth was 14.0% between 1980 and 2000, versus 20.7% for the United States and seven percent for Japan. During the same period, the rate of China’s contribution to global trade growth reached 4.7%, ranking third in the world, following the United States (14.4%) and Japan (6.9%).
Since 2000, China’s economy has fluctuated in step with the global economy. In 2008, when the recession circled the globe, China’s GDP dropped to 9.6%, versus 14.2% in 2007. (Source: ”China GDP: how it has changed since 1980,” The Guardian, last accessed December 19, 2012.)
In spite of the slow recovery of the global economy, China’s economy has continued in its robust ways, attracting increasing attention from the international community. While the U.S. and nations of the eurozone are worried about slipping into recession, the Chinese economy is expected to grow at a slow, but still healthy, 7.4%.
Today, China’s GDP is equal to about one-half that of the U.S. Only 15 years ago, China’s GDP was only one-tenth that of the U.S. With the rapidly shrinking divide, China’s economy could surpass that of the U.S. sooner than previously thought. If the economic growth gap is six percent per year and real appreciation is 2.5% per year, then that would be sufficient for China’s economy to become bigger by 2020. According to economist Stefan Karlsson, “If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.” (Source: ”China economy may surpass US before 2020,” The Christian Science Monitor, January 26, 2012.)
What does the future hold for the Chinese economy?
China’s phenomenal economic growth has significantly increased living standards, and helped give rise to a burgeoning middle class. Over the coming decades, economic mobility means more and more Chinese will enter the middle class, creating one of the most important and influential social and economic groups on the planet.
With increased global prosperity come shifts in influence and power. Some estimate that by 2030, Asia will have surpassed North America and Europe combined in terms of global power, based on GDP, population size, military spending, and technological investment. China alone will probably have the largest economy, surpassing that of the United States a few years before 2030.
A powerful Chinese economy means the economic fortunes of the U.S. and European countries will have a diminishing impact on the global economy. As such, the health of the global economy will be linked to, and contingent upon, how well the developing world does.
In Profit Confidential, we regularly comment on the Chinese economy, where we believe it’s headed, and how an average investor in North American can partake in, and even profit on, the unprecedented transfer of economic power from the U.S. to China.
A few years ago, investors couldn’t get enough of Chinese stocks. This led to numerous frauds committed by crooks in China that has since tarnished the reputation and reliability of all Chinese companies, whether they’re legitimate or not, despite their operating in one of the top growth areas in the world.
While I’m not focused on Chinese stocks at this moment due to better trading opportunities in the domestic stock market, I monitor the country and remain convinced it’s still a key place to have some risk capital invested in. When the broader market understands this, I would expect renewed buying in Chinese stocks sometime in the future.
My view is that the country’s current leadership under President Xi Jinping, who assumed power in March 2013, has a vision to create a country of consumers, just like the United States; albeit, I doubt it will come close to what we see here with consumer spending driving 70% of gross domestic product (GDP) growth. In China, consumer spending drives about 30% of GDP so there’s work to do. In the second quarter, retail sales continued at a double-digit growth of 12.4% year-over-year.
The objective to cut the country’s dependence on exports and foreign investment makes sense. With a potential market in excess of one billion people, it’s the right move.
China may not be in the spotlight for investors now, but you cannot ignore the country. With the recent years of underperformance, I see great longer-term upside in Chinese stocks.
The Chinese economy is growing at well below the double-digit growth of the past, but comparatively, the growth is far superior … Read More
There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … Read More
The Chinese economy had been growing at about 10% a year, like clockwork, for years. Now, China is in the midst of an economic slowdown, with growth expected to come in this year at 30%–50% below China’s five-year average growth rate.
Why is China’s economy growing so slowly, and why does it matter to us here in North America?
Manufacturing, the key component of China’s economy, is quickly slowing. The HSBC Chinese Purchasing Managers’ Index (PMI) declined for the sixth consecutive month in April, registering at 48.1. Remember that any reading below 50 for the PMI suggests an outright contraction in the manufacturing sector. (Source: Markit, May 5, 2014.)
Japan isn’t faring any better; the third-biggest hub in the global economy is facing its own economic slowdown. The government and Japan’s central bank are trying to boost the economy by printing more and more money, but they are failing miserably. Japan’s gross domestic product (GDP) growth has been abysmal for years.
Germany is the only country in the eurozone showing some resilience. Other eurozone countries, like France, Italy, and Spain, are also facing an economic slowdown. Bad debt, tight lending requirements, and high unemployment remain the biggest problems in the common currency region; so big, the European Central Bank (ECB) wants to take the same course as the Federal Reserve and the Bank of Japan and start printing more paper money.
In the U.S., we, too, have a soft economy. The first quarter of 2014 proved to be terrible for corporate profits growth. And if the rest of the world is in an economic slowdown, I don’t know how … Read More
Copper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.
When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.
If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.
Below, you’ll find a chart of the gold-to-copper ratio.
Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.
And the weekly chart of copper prices looks terrible too:
Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More
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