— “Calling the Trend” Column, by George Leong, B.Comm.
The recent correction in the benchmark Shanghai Composite Index (SCI) in China was driven by concerns of a real estate and credit bubble forming in China and the decision of the Chinese government to partly halt lending by banks. It’s feared that the action will hurt economic growth in China, but, at the same time, it may be the right move to avoid a financial collapse in the country.
Despite efforts to control the growth, China will again be front and center as far as investment growth opportunities for investors looking for some diversity and added price appreciation potential.
Compared to the United States, the growth comparison between China and the U.S. is a tale of two countries. The U.S. revised fourth-quarter GDP came out at 5.9%, up from the estimate of 5.7%. The reading was strong, but we again need to see the readings going forward, as the Q4 has been factored into the market. The GDP of the first and second quarters is estimated at the three-percent rate, according to the National Association for Business Economics. For the unemployment rate to come down, GDP growth has to be at over five percent over an extended period. The problem with this is the threat of inflation and higher interest rates should this happen.
In comparison, GDP in China has been growing at around eight to nine percent, but growth in 2010 could be as high as 10%. This growth is staggering and continues to point to above-average risk and reward investment opportunities in China. Some pundits fear an asset bubble in China, but, according to the International Monetary Fund, there is no serious risk of asset bubbles. The Chinese government’s strategy to control the flow of capital from banks will help to regulate growth and make sure it does not get out of hand, but, at the same time, not wanting to impact the country’s economic engine.
On a positive note, subject to the tighter bank lending orders, the People’s Bank of China suggested that it would “gradually guide monetary conditions back to normal levels from the counter-crisis mode” in its quarterly monetary policy report, according to Bloomberg. In January, bank lending in China surged to $203.5 billion, up from $55.6 billion in December, although the pace of lending did slow sharply towards the end of the month.
So, where are we now? We continue to consider China to be the land of opportunity for investors looking for added growth and a boost to their overall portfolio returns. The country’s GDP growth clearly supports this. The returns can often be spectacular, as we saw in 2009, but also keep in mind that investing in Chinese stocks listed on U.S. and Canadian exchanges can add high risk. So, while this is the case, the opportunity for above-average gains more than compensates for the added risk. The key is diversification in your portfolio across domestic and foreign stocks, and across sectors and market-caps.