Chinese Economy & Stocks Flying High

The economy in China continues to sizzle. The trend of high GDP growth has been quite impressive. A few months ago, China’s GDP growth was expected to fall to around 10% for 2007, but now the GDP for this year has been revised upwards. China’s GDP is now predicted to grow at a stellar 11% this year, according to China’s State Information Center. Strong GDP growth will drive up Chinese stocks.

 Chinese companies are reporting record profits, which are helping to drive buying. Stocks listed on the SCI and Shenzhen Stock Exchange rocketed up about 62% in 2006. According to the “South China Morning Post,” total profits on the two Chinese exchanges were a combined $51.0 billion, up from $32.0 billion in 2005. For 2007, the earnings growth is expected to continue, and this could drive the Chinese markets even higher.

 The news is excellent for Chinese companies, but may force additional measures to curb growth via the use of policy or interest-rate hikes. For instance, the People’s Bank of China (PBOC) suggested that it may use a pre-emptive monetary policy, due to excessive liquidity in China’s banking system, according to information in the PBOC’s Q1 monetary policy report. Furthermore, the PBOC said that it may seek a more flexible exchange system, news that is obviously put forth to reduce trading tension between China and the U.S.

 The reality is that the astounding growth for China is seen as successful by the government, as it helps to build the country and bring it in line with Western countries.

 Yet the growth could also prove to be a double-edged sword because of its impact on inflation, although it is not an issue yet in China. The Chinese monetary authorities will need to consider increasing interest rates should inflation rise.

 As we saw with the correction in Chinese stocks, which had been flying high, fortunes in China can change rapidly and can easily catch investors off guard.