The Great Fall of China
Economics / China Economy Jan 23, 2009 - 06:02 AM GMTBy: Q1_Publishing
Earlier today, China announced its economy grew at a 6.8% in Q4. This is not very good news at all. China's GDP growth is inching perilously close to 6% economic growth. Which is viewed as the minimum to keep the lights on. It's a critical level the world is watching closely.
Say what you want about the validity of China's “official” numbers, but it's bad and it's probably going to get worse. As you can see in the table below, the downtrend is still accelerating.
| China's Quarterly GDP Growth Rate | |||||
| Time Period | Q4 -2007 | Q1 - 2008 | Q2 – 2008 | Q3 – 2008 | Q4 - 2008 |
| GDP Growth Rate | 11.2% | 10.6% | 10.1% | 9% | 6.8% |
| Increase (Decline) | -- | (0.6%) | (0.5%) | (1.1%) | (2.2%) |
The U.S. is Sneezing…
At this rate, China is on its way to a full-blown crisis. As we looked at a few months ago when the first wave of manufacturer shutdowns in China swept through the country, there would be a lot more to come. After all, about 1/3 rd of China's economy comes from production, manufacturing, and exports and about 1/3 rd comes from expanding export and production capacity.
That's why China's economy takes a double hit during tough times. When toy factories are shutting down, the economy loses the jobs. Of course, there's no need for new toy factories either, so the production expansion sector of its economy gets hit too.
The old saying, “when the U.S. sneezes, the rest of the world catches a cold,” certainly seems to be proven in China. China Daily estimates, “A drop of 1 percentage point in the economic growth of the US and Europe would send the Chinese exports falling by 4.75 percent, and the exports of electronics and textiles down by 0.5 percent respectively.”
Now, we're starting to see the impact on GDP growth. Of course, the quickest way to get China back on track is to get exports rolling again. As we saw a few weeks ago, that's not going to happen anytime soon. That's when China announced its exports fell the fastest in over a decade.
This is the first time China has had to deal with all three of its top customers – U.S., Europe, and Japan - being in recessions.
What does this mean for China stocks?
Well…since November, there's still a lot of interest in China stocks. It's pretty tough to make a case against the long-term opportunities in China. The country's economy is showing signs of change. For instance, last month retail sales increased more than 17%. So internal demand is growing, but it's got a long way to go. The short-term outlook, however, isn't very strong at all.
One indicator I look at is the volatility component of long-term options on the iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) which tracks 25 of the largest publicly traded Chinese companies. The volatility on the FXI is the equivalent of the VIX (CBOE Volatility Index, or “Fear Index”, for the S&P 500). Although it has a bigger exposure to mining and energy stocks than the S&P 500, it's the closest thing to a “China VIX” as you're going to find.
The VIX is basically a way to value the cost of downside protection. It's the cost of insurance. When the market is falling, the VIX goes up and vice versa. Today, the China VIX ticked up to 80 (for the January 2010 FXI 25 Put option). Compare that to the S&P 500 VIX of 50 and it shows there's still some strong demand for “insurance” against Chinese stocks, but it's not near crisis or panic levels.
Combine a steadily declining economy, and growing fear, and it'd be a pretty safe bet there will be an opportunity to “buy China” down the line at a noticeably better price. We'll keep you posted in our 100% Free e-Letter, the Prosperity Dispatch . Remember, China's economy is built for booms and no one knows how well it's going to fare during a downturn. So far, it hasn't fared well at all.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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