China will be undergoing a sort of metamorphosis, as the country gets set for its once-in-a-decade change in leadership next month. Could you imagine if we followed that route?
Whoever the new president and prime minister will be (widely expected to be Xi Jinping and Li Keqiang), the focus is clear, as the country will look at breaking up the monopolies. In my view, creating a more oligopolistic or competitive business climate in China could drive entrepreneurship and a more active business climate akin to that of the U.S.
At the core of the pending change is the stalling in the Chinese economy, due to the financial crisis in the eurozone and Europe, along with overall slowing in the global economy. The country’s third-quarter gross domestic product (GDP) contracted to 7.4%, which was inline with the consensus estimate, according to Bloomberg. (“China GDP growth slows to 7.4%,” China Economic Review, October 18, 2012.) And while GDP growth in China has declined for seven straight months, there are some bright spots.
China reported improvements in its industrial production (up 10.0% year-over-year) and fixed-asset investment (up 20.5% year-over-year) in September, based on information from the National Bureau of Statistics of China. Moreover, the 13.0% year-over-year rise in the per-capita total income of urban households is interesting; I view this as significant since the middle class in China, similar to America’s middle-class, will be depended upon to spend to drive the economy. (I like the Internet sector in China, which you can read about in “Why China’s Internet Sector Is Lucrative.”)
China has suffered as the demand for Chinese goods declines, but there were some encouraging signs. The country’s exports exploded up 9.9% in September versus 2.7% in August and one percent in July, according to Bloomberg.
What happens in China will have an impact on the U.S. economy and the global economy. This linkage amongst the economies worldwide has become more profound over the past decade. This is why, as an investor, you need to be fully aware of the situation across the Pacific.
The state of the Chinese economy continues to ramp up heated discussion specifically concerning the immediate need for further monetary stimulus to drive domestic consumption, which will likely be a key goal for the new leaders. China realizes you cannot simply pump money into the economy despite having over $3.0 trillion in reserves; but there must be a strategy to get the Chinese consumer to spend more and drive GDP.
The bottom line is that there’s lots of work ahead for the new Chinese leaders. I expect the country to continue to introduce new monetary stimulus into the economy.