It’s been a long-debated, much anticipated event, and it has finally arrived. You can’t say that you didn’t get plenty of advanced warning either.
What event am I talking about? It’s the economic slowdown now underway in China, of course. That day has finally arrived. It’s time for the China-bears to rejoice.
Growth has indeed slowed in the world’s fastest growing economy… to 10.6% in the first quarter of 2008, down from 11.9% for full-year 2007. That’s not exactly falling off a cliff now is it?
“But soon” say the bears, “any day now China will blow-up.” Don’t bet on it, says I.
Beijing actually revised its final 2007 growth numbers last week, upward… from 11.5% to the higher 11.9% for all of 2007. Even after “slowing” to the mid-10% range over the past three months, China’s economy continues a very robust expansion – growing about 18-times faster than the U.S.!
Exports Are NOT the Key to China’s Growth
Such strong growth is especially amazing considering the headwinds coming from the ongoing credit crunch and soaring food and energy costs. Heck, if China were expanding at just half the current rate, it would still be the world’s fastest growing major economy.
China’s export growth to the U.S. and Europe is slowing, no doubt about it. In fact, growth in shipments to Wal-Mart and other U.S. customers has been steadily declining over the past few years.
Most China-bears forget to mention this while warning of a devastating slowdown in exports that has in fact already happened. It started long before the Wall Street credit crunch.
Increased trade with other emerging markets, particularly in Asia, has more than picked up the slack for slowing shipments to the U.S. A recent Economist magazine article points out that “Asia and the Middle East accounted for more than 40% of China's export growth in the first ten months of 2007, North America for less than 10%.” In fact, China’s overall trade surplus continues to grow – by $41 billion in the first quarter of 2008 – up 40% from a year ago. That’s in spite of slowing exports to the U.S.
Investment and Internal Consumption Drive Expansion
Another popular misconception of the China-bears is this obsession with China as an export-only economy. Exports are very important for sure, but China’s economy is also a great story of accelerating internal demand growth. In fact, even if China’s “net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand,” according to the Economist.
Retail sales in China soared at a 21.5% annual rate in March. That’s the largest gain in consumer spending in over nine years! Over 500,000 new automobiles drive off dealer lots and showrooms each and every month! As a result, China’s factories are running flat-out to keep up. Industrial production in China surged at close to an 18% annual rate in March, accelerating from 15.4% in February, the fastest pace in five-months.
This is yet another crystal clear sign that internal consumption is leading the Middle Kingdom’s impressive growth, just as much as external trade.
So how should global investors square China’s robust growth with a stock market that’s plunged over 30% in the first quarter? That’s a great question. In tomorrow’s blog post, I’ll take a closer look at what’s driving China’s share prices now, and what to look for next. Stay tuned!
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