Why China Will Win the Blame Game

06/20/2011 12:30 pm EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

It may be easy for the West to blame China for its own troubled markets, but China isn't to blame...and in the words of Mark Twain, its death has been highly exaggerated, contends James Trippon of China Stock Digest.

I’m about up to here with the blame game. When will the pundits stop blaming America’s slumping stock markets on a slowdown in China?

Well, here’s a bulletin. China’s growth may have backed off double-digit annual increases, but that doesn’t mean that the economy isn’t red hot by American standards. In fact, the problem facing China is growth—exactly the opposite of the real estate-induced hangover facing the US.

China’s biggest challenges involve overheating, growing too quickly. Inflation is still running at unacceptably high levels. Although Consumer Price Index figures backed off a fraction last month, showing 5.3% inflation, demand is still driving prices higher.

China’s growth is not a phony economy like the American real-estate bubble. Let me demonstrate:

  • Profits of China’s industrial firms are up 32% in the first quarter (year-over-year).
  • Profits of Chinese companies listed in Shanghai and Shenzhen rose 37% in 2010
  • China’s total industrial value-added output jumped 14.4% during the first quarter (year-over-year).

There's a cooling trend, but not enough to knock the stuffing out of commodities and shares of companies exporting to China.

Goldman Sachs made headlines by lowering its growth estimates for China a week ago. Instead of 10% growth for the year, Goldman now predicts 9.4% expansion. Some contraction!

Naysayers also point to the weak performance of the Shanghai Stock Indexes as a sign of a slowdown. The Shanghai Composite Index has backed away from the psychologically impor­tant 3,000 mark and is now hovering just above 2,700. How is that possible?

Markets look ahead, and Shanghai sees global weakness among the key markets China ex­ports to. That’s why it remains crucial for China to boost internal consumption.

Economic stability depends on relying less upon global markets. There is also concern that interest-rate increases to tamp down inflation could be bad for business.

A recent release from the World Bank signals good news for China and for the world. The re­port says China won’t need to depend on its export surplus for growth much longer.

The World Bank says China’s trade surpluses are expected to average just $200 billion in 2011 and 2012. That amounts to a mere 2.7% of projected gross domestic product, or just 0.2 percentage points of its expected growth. It is a vanishingly small amount.

China’s disappearing trade surplus will weaken Washington’s arguments that an undervalued yuan is responsible for China’s growth. The US and China are interdependent. So stabilization and growth in the American economy are important to China and Chinese corporations.

The drag on Chinese stocks has been caused by weakness abroad. And by fears of overheating, not shrinkage in China’s roaring economy.

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