Slowing Dragon?

20/08/2010 at 3:28 pm

One of the key drivers of the poor performance of equity markets in the second quarter was the perception that action taken by the Chinese authorities to take steam out of the economy would threaten world growth. The release of continued upbeat data from China this week prompted us to consider how realistic those concerns are looking a few months down the line.

It is true that there are more question marks than usual over Chinese economic reports. Not every country has to impose penalties on officials who are caught falsifying statistics. Can an economy whose latter day prosperity was established as the workshop of the world really have been insulated from the collapse of its export markets to the extent that it grew by over 9% in both 2008 and 2009? If so, the country really is a riddle, wrapped in a mystery, inside an enigma.

Taking the data at face value, however, as we must, this week’s numbers are of a pattern with recent releases that together suggest an economy in rude health. Some July numbers released over the last couple of weeks are admittedly lower than they were a month ago. Annual growth in exports: 38.1% (down from 43.9% in June). M2 growth on the year: 17.6% (18.5%). Retail sales: up 17.9% on the year (18.3%). Increase in industrial production over a year ago: 13.4% (13.7%) … The list goes on. So while it may be true that the numbers are technically showing signs of slowing, the conclusion must be that China continues to expand at a breakneck pace. (This is of a piece with the situation in developed economies too – as we wrote a week ago, an easing off in growth rather than a “double dip”.)

What does this mean for markets? Well, for one thing, fears in the spring of a pronounced policy-driven slowing in China look to have been overdone. And if equity markets continue their recent falls on growth concerns, that would look overdone to us as well.


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