The China Surprise: Continued Growth

Many thought China was set to stall in 2011, but so far this has not been the case. The country’s gross domestic product (GDP) growth continues to be impressive coming in at 9.7% in the first quarter, above the estimate of 9.55%, according to the National Bureau of Statistics. The results also show the significant growth difference between China and the U.S. and Europe. China is continuing to roll along at high speed, but it must be controlled.

Chinese stocks continue to show some buying momentum following the Lunar New Year break. The Shanghai Composite Index is edging higher above the key 3,000 level and is up 8.62% this year as of April 15, well above the comparative returns of the NASDAQ, DOW, Russell 200, and S&P 500.

My economic analysis is simple. The superlative GDP growth is great, but the problem is the associated inflation that often surfaces as consumers spend more.

China reported its highest inflation in 32 months at 5.4% for the year to March, which is well above the country’s previous upper target of three percent and its revised target of four percent. The average inflation rate in China from 1994 to 2010 was 4.25%, so there needs to be some work done here to relieve the inflationary pressures. The reality is that prices continue to rise, as consumers continue to spend.

Interest rates continue to ratchet higher and I expect the upward move to continue. The Chinese government has placed a cap on certain food products and subsidizing some of the poorer rural workers.

Traders in Asia are probably encouraged by the Chinese government’s battle against inflation and to control the rate of growth. China needs to make sure to keep its course and tackle inflation, as rising prices will hurt the majority of the 1.3 billion people living in China who are trying to just get by on a daily basis.

Chinese inflation is a real potential threat to growth and stability, not only in China, but also globally with its trading partners. We could see higher-cost Chinese-made goods as prices rise and this will drive up Chinese-made goods sold in the U.S.

Yet, overall, China is on the right path towards developing into a rising world economic power as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. If it is saleable and in demand, then you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the U.S.