How China is Prepping the Market for Sub-Par Growth

Today, just two weeks after the end of the June quarter, China will release its second quarter GDP statistics. It’s a miracle of statistical compilation.

So let’s look at China’s GDP. It should come in comfortably around 7.5%. That’s the current official target for China’s ruling Communist party. And given the statistician has just two weeks to compile a vast amount of data, it’s fair to say they probably start at the end point and work backwards to get the desired result. Although we wouldn’t be surprised if the number comes in slightly under the official target to signify a weakening of future growth.

In fact, Chinese officials are already preparing the markets for a lower growth future. Last week, China’s Minister of Finance said that economic growth of 7% or even 6.5% wouldn’t pose too much of a problem for China. That’s prepping the market for lower future growth.

But the Ministry of Propaganda wasn’t too comfortable with such candid rhetoric. Over the weekend, China’s official Xinhua News Agency corrected Lou Jiwei’s quote and reaffirmed China’s official 7.5% growth target. Gotta keep the confidence up…because the only thing to fear is fear itself, right?

This tells us there is still quite a tug-of-war going on in China between those who recognise the need for economic rebalancing and those whose wealth and power rely on the status quo. There is no doubt that China’s economy could keep growing at 7.5% for another few years, but it would set itself up for an almighty bust if it did.

Having just gone through the biggest credit boom in modern economic history, it’s probably already too late to avoid the bust. But at least China’s new leadership understands that their longer term survival depends on managing the coming bust as best as they can.

So today’s number, whether it comes in bang on target or a little below or above, is meaningless. Because history tells you that all credit booms end in periods of sub-par economic growth. What’s sub-par growth for China — 5%, 4%? That’s sounds about right to us, and in 2014 that’s what we think you’ll see.


Greg Canavan+
for Markets and Money Australia

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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