Gross domestic product (GDP) growth in the United States in the first quarter was a paltry 0.6%. This paled in comparison to China, where the country’s GDP growth in the first quarter grew at a staggering 10.6%, albeit it was lower than the 11.7% reported for the same first quarter in 2007, according to the National Bureau of Statistics. The reality is that many economists have made downward revisions in China’s economic boom, but compared to the United States, it remains pretty impressive. The concern of course is that continued slowing in the U.S. will impact domestic consumer spending, thus impacting the demand for goods produced in China, which would affect GDP growth there. In my view, this is a risk factor that cannot be ignored when evaluating Chinese stocks.
China is also faced with a trend of rising inflation and interest rates, which is opposite to what we are seeing in the U.S. Inflation continues to be a problem in China, as the consumer price index (CPI) jumped a whopping eight percent year-over-year in the first quarter due largely to higher food prices. To try to curb the inflationary pressure, the People’s Bank of China (PBOC) increased the reserve requirement ratio for commercial banks to 16%. The trend has been up and is necessary.
The country’s export market for goods and services has also been impacted by the strengthening of the Chinese Yuan, and is something that the U.S. and Europe is applauding. A higher Yuan helped to drive an 11% decline in China’s trade surplus in the first quarter to $41.42 billion, which was the first decline about three years.
In spite of a decline in GDP, China remains a hot spot for growth opportunities going forward in my view. I continue to like the longer-term situation in China and believe you should have capital invested in China, whether it is with large-cap, blue-chip Chinese companies or with small, emerging, higher-risk stocks. Areas that look encouraging are insurance, banking, technology, retail, industrial, and online advertising. The key to investing in China is to be diversified. Invest only a portion of your capital in China. Besides small-cap stocks, you can also buy large-cap Chinese stocks or major U.S. companies with an expanding presence in China.