The Chinese Economy: What
You Need to Know Right Now

By Thursday, October 6, 2011

There have been warning signs in China that investors must be mindful of, including high inflation, speculative real estate buying, slower demand, and slower gross domestic product (GDP) growth. There have been warning signs in China that investors must be mindful of, including high inflation, speculative real estate buying, slower demand, and slower gross domestic product (GDP) growth.

The Chinese economy, which had been firing on all cylinders and was the envy of the world, is showing some growing pains that could hamper the country’s rate of growth. This is impacting Chinese stocks both in China and those listed on U.S. exchanges.

For 2011,China’s GDP is estimated to slow marginally to 9.4% from the previous 10.0%, according to Goldman Sachs. For 2012, China’s GDP is estimated to slow to 9.2% from 9.5%. Yet, despite some stalling in China, economic growth in the Asia-Pacific region is promising, including seven-percent projected growth for the developing Asian economies and a stellar 8.3% for China’s neighbor, India.

But what is important is the economic landing, whether it will be soft or hard. A hard landing would devastate stock markets around the globe. The Chinese government has steadily increased the cost of borrowing, making speculative buying of real estate more difficult. This strategy has so far resulted in a slight decline in inflation and flattened property values.

One problem is that the global demand for cheaper-made Chinese goods has been on the decline. Part of the reason for this is that other industrialized countries are looking at driving domestic employment by protecting local manufacturing and this would negatively impact China. For this reason, China wants to stimulate domestic demand for its goods.

Credit Suisse predicts that the household wealth in China would double to $35.0 trillion by around 2015, based on achieving sustainable GDP growth at or near the current growth rate.

Gartner Research estimates that China will represent 72% of the world’s growth within the next 20 years. According to the Carnegie Endowment for Peace, China’s economy will surpass that of the U.S. by 2035 and grow to be twice as large by 2050.

So far, Chinese consumers are spending. While retailers in the United States are currently struggling to lure shoppers to their stores, it is a vastly different story in China, where consumers are spending. Domestic sales in China were about $2.23 trillion in 2010, versus $1.8 trillion in 2009, according to the National Bureau of Statistics.

In the near future, China is slowing, and it could worsen. The flow of Chinese new issues to U.S. exchanges have all but dried up, as the SEC tightens up its regulation of China-based companies wanting to list in the U.S., especially those doing so via reverse mergers.

While the current market risk regarding Chinese stocks is extremely high as the threat of global slowing continues, I continue to like the future for China as an economic powerhouse; however, we need to get past the near-term hurdles.

About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »