China: On the Offensive Again

China: On the Offensive AgainChina is aiming to land an astronaut on the moon sometime after 2020. For the time being, the country is building a massive war chest that includes a whopping $800 billion or so in U.S. debt. But the country, unlike the U.S. and Europe, is clearly not hurting for money.

There have been Chinese bears surfacing, suggesting that China would see its banking system and real estate market collapse in a hard landing. I was not of that camp. China continues to deliver and remains one of the top growth regions in the emerging markets.

In the fourth quarter, China’s GDP came in at 8.9%, which is impressive. However, it is down from the 9.1% in the third quarter, representing the lowest rate of growth in 10 quarters. The reading was nonetheless above the consensus 8.6% estimate. The country’s GDP expanded at 9.2% in 2011, while down from the sizzling 10.4% in 2010.

In December, China’s purchasing managers’ index held below the neutral 50 level at 48.7, but was higher than the 47.8 reading in November.


In my view, the lower rate of growth is positive, as the inflation in China has also steadily declined to more manageable levels. The country’s consumer price index (CPI) fell to 4.1% in December, down from 6.5% in July, representing five straight months of monthly declines in inflation.

The lower GDP was a controlled event by the Chinese ruling party after five straight increase-rate hikes and other monetary tightening in 2011 to get a grip on inflation. At 8.9%, the growth is superior to our anemic GDP growth and the muted growth in Europe.

The dire growth situation in the eurozone is a major risk and China has been impacted, as export demand for cheap Chinese goods has declined due to the lower demand from Europe and the U.S. The Chinese economy is face with idle manufacturing facilities and excess capacity. The country built an enormous landscape for manufacturing.

China wants to avoid a hard landing and halt the slide in GDP growth by initially pumping over $540 million into its banking system for new loans. If the country’s consumer inflation can fall to below the four-percent target towards the previous three-percent target, we could see additional monetary stimulus, including interest-rate cuts in China.

China’s real GDP is estimated to expand 9.5% in 2012, according to the International Monetary Fund, but there many question marks as to whether this is achievable given the stalling in Europe and other industrialized regions in Asia and Latin America. GDP growth in the Chinese economy could plummet to as low as 6.8% in 2012 should the growth situation in Europe and the U.S. falter, according to the Asian Development Bank.

China continues to be critical as far as the global economies go. The reality is that any impact on the Chinese economy would send shockwaves around the world and we obviously don’t want this.

A major area for importing in China is gold, which has helped to give some life to stalling gold prices. You can read my thoughts on this in China and India: Gold Buying Bullish