China, the world’s second largest economy and once a roaring Asian tiger, is growing tired. China released a litter of economic data for 2014 Friday that shows an economic slowdown that started in late 2013 dug deeper in the New Year.
Investment growth dropped to an 11-year low. Industrial value-added output growth fell a five-year low. Retail sales growth registered a nine-year low amid a deceleration in real estate construction and housing prices.
“Altogether, the data point towards a deepening slowdown in the Chinese economy,” Brian Jackson, China economist at IHS Global Insight. “That may place considerable strain on the government’s efforts to secure a 7.5% real growth target this year.”
“While it is true that Lunar New Year distortions can be significant, the need to stretch back nearly a decade to find comparably sluggish growth rates make clear the slowdown’s depth,” Jackson added. “If the slowdown continues, the government is likely to take a more proactive stance to help curtail the short-term bite of economic adjustment, although perhaps at the expense of an ambitious reform agenda.”
The National People’s Congress met last week and announced a grandiose reform agenda for 2014. Many of those reform goals are needed to ensure long-term economic growth while some may incite market volatility. China aims to grow its economy by 7.5% this year to meet the demand for employment.
Retail sales in China were forecasted to rise 13.5% but only rose 11.8%. Industrial production was expected to climb 9.5% only increased 8.6%.
“While most other countries would kill for these numbers, they are a disappointment in China,” Harry Dent, an economist and founder of Dent Research in Delray Beach, Fla. wrote in a client letter Friday. “In fact, the level of retail sales was the slowest it’s been for this time of year since 2004. What’s more, the decline in growth covered both urban and rural areas.”
China accounts for 55% of global iron-ore demand and two-thirds of seaborne demand, Bank of America Merrill Lynch wrote in a report released March 13. As the largest wood pulp consumer, China accounts for 30% of global demand at 15 metric tons, followed by Western Europe, at 14 metric tons, and North America, 7.5 metric tons, according to BofA Merrill. China produces about half of world’s steel.
China’s once roaring economy is growing tired and the Asian Tiger’s fatigue will be felt around the world. Lower demand for commodities will especially hurt small emerging market countries dependent on selling natural resources.
China’s leaders have announced they will eventually let the free market determine interest rates instead of the government setting them.
“This is one of those things we will believe when we see it happen,” Dent wrote. “If the Chinese really do allow interest rates to fluctuate, then depositors might earn a rate of return close to the rate of inflation. If that happens, then Chinese consumers would arguably be less inclined to spend, which is the opposite of what the government wants.”
“Beijing is trying to turn China into a domestic demand machine,” Dent added. “So far it hasn’t worked, and higher rates of interest on deposits would make the situation worse, not better.”
Ron DeLegge, editor of an investment advisory site ETFGuide.com, recommended his clients sell short China ETFs to bet on falling prices.
“The global financial system is fragile and at risk for a major shock” DeLegge wrote in his March newsletter. “Aside from trading glitches and other multi-billion catastrophes, China’s banks are in a liquidity crisis.”
China with a population of 1.36 billion people and a gross domestic product of $8.22 trillion, the world’s second largest.
The MSCI China Index declined 10% year to date and 7% in the trailing year. It lost an average of 5% the past three years. It has returned 8% on average annually over the past five years as well as 10 years.
Its benchmark, the MSCI Emerging Markets Index, fell 6% year to date and 11% in the past year. It lost an average of 6% annually the past three years. Longer term, it has returned 12% and 7%, annualized the past five and 10 years.
In its heyday, China’s stock market, as tracked by the iShares MSCI China ETF (FXI) leapt 83% in 2006, outrunning all global markets. The once roaring Asian tiger has lagged all global stock markets since, which suggests the forward-looking stock market anticipated that China’s economy started growing tired long before it was confirmed by the data.
By Trang Ho
Harry Dent, economist and founder of Dent Research (report)
Ron DeLegge, editor of ETFGuide.com (report)
Bank of America Merrill Lynch (report)
Brian Jackson, China economist at IHS Global Insight (report)