Do Chinese Market Issues Mean Investors Should Back Off?

07/21/10 — China may be the most significant growth market in the world, but there are some real issues that need to be addressed or there could be further weakness going forward.

There are increasing signs of a potential slowdown in China. There have been downward revisions in the country’s Gross Domestic Product (GDP). The People’s Bank of China suggested that GDP could slow to two percent to three percent in the first half. The country’s purchasing managers’ index, similar to the gauge used in the U.S., fell to 52.1 in June from 53.9 in May, while the rate of the country’s crude-oil refining output slowed in June.

A decline in infrastructure spending in China will impact GDP, yet there continues to be new spending programs aimed at developing the previously overlooked western regions in China. The country’s central government will invest over $100 billion across 23 new infrastructure projects in western China spreading to Inner Mongolia in the west. Projects include railways, roads, airports, coal mines, nuclear power stations, and power grids.

In spite of the potential slowing, China continues to grow well above other industrialized countries in both Europe and North America. The Organization for Economic Co-operation and Development (OECD) predicts that China’s GDP will rise over 11% this year, but will slow to over 10% in 2011. These are impressive growth metrics, however you look at them.

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And, if all pans out, China could become the world’s biggest manufacturing country in 2011 based on output and surpass the United States, according to IHS Global Insight. The research showed that the U.S. is accounting for about 19.9% of global manufacturing output in 2009, compared to a close 18.6% in China.

We all sense the move by China to the position of top dog will inevitably take place, like it has in the areas of Internet users, auto sales, and cell phone users

So, while it remains a frustrating time for holders of U.S. and Canadian-listed Chinese stocks, I remain long-term confident and bullish on China despite the short-term risk. Yes there will be some rough sailing in the short term, but you would expect this. The key in my view is to look at companies that you like and accumulate positions on market weakness. This may be an initial position or dollar cost averaging. The fact is that Chinese companies continue to report excellent operating results and growth, but have suffered due to the issues in Europe and China.

In my view, the risk is much higher now. The key is patience to withstand the market jolts and believing in the long-term prospects of China.