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.
In just a few years following the Lehman crisis, credit in the Chinese economy has gone from $9.0 trillion to $23.0 trillion. Comparing it to the gross domestic product (GDP) of the country, credit has ballooned to 200% of GDP—it was only 40% before the U.S. subprime bubble burst.
Fitch Ratings’ senior director in Beijing, Charlene Sue, said this week, “…this is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial.” (Source: Evans-Pritchard, A., “Fitch says China credit bubble unprecedented in modern world history,” The Telegraph, June 16, 2013.)
Adding to the credit worries in China, just like the U.S. economy, consumers in the Chinese economy are shying away from spending. According to the China Association of Automobile Manufacturers, car sales in the Chinese economy in May grew at a slower pace than the previous month’s. The car sales growth rate registered at nine percent in May, compared to 13% in April. (Source: Financial Times, June 9, 2013.)
Furthermore, manufacturing in the Chinese economy has been witnessing a slowdown. Exports from the country have fallen victim to anemic demand in the global economy. Sadly, this year, as per government estimates, the Chinese economy is expected to grow at the pace of only 7.75%—much slower than China’s past double-digit growth rates.
The troubles in the Chinese economy continue to mount, but with the optimism seen in the key stock indices, investors are ignoring their implications. I can’t stress this enough: growing problems in the Chinese economy will not only hurt the … Read More
While government data continue to show a lack of inflation in the U.S. economy, the bond market screams the opposite.
The Consumer Price Index (CPI), the most commonly quoted measure of inflation, increased only 0.1% in May after declining 0.4% in April. Since the beginning of the year, from January to May, inflation in the U.S. has edged higher by only 0.2%. (Source: Bureau of Labor Statistics, June 18, 2013.)
But the bond market says this isn’t true.
Since May, we have seen yields on U.S. bonds skyrocket. Take a look at the chart below; it shows the change in yields on 30-year U.S. bonds (indicated by the red line) and 10-year U.S. notes (marked by the blue line). Note the circled area.
Chart courtesy of www.StockCharts.com
In a matter of a few weeks, yields on 30-year U.S. bonds have jumped about 19% and 10-year note yields have skyrocketed almost 35%.
This is dangerous for bond investors. As the yields on bonds climb higher, their prices slide lower, bond investors face losses…and they’re fleeing the bond market.
For the week ended June 5, long-term bond mutual funds witnessed an outflow of $10.9 billion. Looking at it on a monthly basis, the long-term bond mutual funds haven’t seen an outflow since December of 2008. This month may just be the first since then. (Source: Investment Company Institute, June 12, 2013.)
Even the foreigners, who have been providing credit to the U.S. economy, seem to be running toward the exit. According to Treasury International Capital Data, in April, foreign residents were net sellers of long-term U.S. bonds. Private foreign investors accounted for … Read More
In 2012, the Chinese economy grew at the slowest pace in 13 years. This year the country is expected to grow only 7.5%. (Source: Reuters, June 9, 2013.) Sadly, I believe this growth projection is still too optimistic a prediction.
The second-biggest economy in the world is sending out warning signals, but no one seems to care.
Statistics clearly show the Chinese economy is witnessing an economic slowdown. I warn you that its implications will be massive for the global economy and the U.S. economy.
Last month, exports from the Chinese economy increased only one percent from a year ago, while economists were predicting an increase of seven percent—very disappointing for the Chinese economy. (Source: New York Times, June 8, 2013.)
Adding to the misery, it wasn’t too long ago when the credit rating of the Chinese economy was downgraded by Fitch Rating Services from AA- to A+ (investment grade with some risk). At the time, Fitch said that the Chinese economy had “underlying structural weaknesses.” Credit in the country has reached 198% of gross domestic product (GDP). Back in 2008, it stood at 125%. (Source: “Fitch Downgrades China’s Credit Rating,” Financial Times, April 9, 2013.)
Bringing all of this into perspective, if the economic slowdown in the Chinese economy persists, we will see commodities prices decline further, because Chinese companies are such big consumers of commodities. For example, copper prices are already down more than 10% since the beginning of the year. As a result, companies in the basic material, industrial, and energy sectors will see their profitability decline.
It’s common sense: if an industrial metal … Read More
Chinese stocks continue to be major underperformers this year—they have been for the past three years from 2010 to 2012. I must admit that having been a bullish supporter of Chinese stocks, it has been a major disappointment; but like everything in life, things will surely get better. I’m just not putting a timeframe on when Chinese stocks will regain their glory and outperform.
At this juncture, there is no evidence that the landscape for Chinese stocks will improve soon. The Shanghai Composite Index (SCI) is up a mere 2.12% this year, easily underperforming the S&P 500 and the Dow. Even the Nikkei 225 has blown away the SCI.
Just take a look at the comparison in the chart below of the SCI (as indicated by the red candlesticks) and the S&P 500 (as indicated by the green line). The purple oval on the right side of the chart shows the divergence forming between the SCI and the S&P 500 since around 2008, based on my technical analysis.
Chart courtesy of www.StockCharts.com
In the short- to medium-term of less than one year, the SCI will likely continue to underperform the U.S. key stock indices.
For Chinese stocks to come back, two things must happen:
First, China must make sure the Chinese economy doesn’t falter back into a tailspin. The new government, under President Xi Jinping and Premier Li Keqiang, must work to drive domestic consumption in the country to levels similar to those in the United States and Japan, where consumer spending accounts for about two-thirds of the countries’ gross domestic product (GDP). In China, domestic consumer spending currently only … Read More
The reality of the situation is that the key stock indices are treading in shark-infested waters and the risks are piling up daily. I see bearish signals all over, but the theme among investors, even conservative investors, continues to be “keep buying.”
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Looking ahead, corporate earnings, which ultimately drive the direction of the key stock indices, don’t look so good. So far, 106 companies in key stock indices like the S&P 500 have provided their corporate earnings outlooks for the second quarter, and more than 80% of them have issued earnings outlooks that are negative! Corporate earnings growth for the second quarter is now projected to be only 1.4%—and the estimate keeps going down! (Source: FactSet, May 28, 2013.)
And this chart doesn’t look good either:
Chart courtesy of www.StockCharts.com
The above chart shows the performance of the S&P 500 utilities stocks through an exchange-traded fund (ETF) called the Utilities Select Sector SPDR … Read More
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