What's the Real Story in China?

10/02/2013 12:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The data on the prospects for the Chinese economy is mixed, says MoneyShow's Jim Jubak, while the GDP numbers are encouraging, the corporate numbers are not yet.

We are seeing a very, very mixed picture on the Chinese economy, that the official numbers, which sort of focus on GDP growth, look like they are pretty strong. It looks like we are going to see better growth for the last, oh, for September, October, November, December, and then into 2014 than we have seen before. That is at least what we are getting out of official numbers like the Purchasing Managers' Index, which came in slightly above expectations for September. On the other hand, if you look at, not the GDP numbers, but the corporate numbers, they are looking kind of grim.

What those numbers are reporting, whether it is from an organization such as Forensic Asia, which looks at corporate accounting and stocks in the Chinese market, or whether it is from something called China Beige Book, which is an attempt to pull together economic numbers for China the same way that the Fed does for the United States, but it is a private company, what they are saying is that while GDP may be growing, because you have over capacity, because you have falling prices, what you are seeing is not much in the way of revenue growth at a lot of companies, they are competing for too little market among too many companies, and you are seeing profits fall.

The corporate profits are really lagging where they were, in terms of growth, a year ago. You have two different pictures of the Chinese economy. The one picture that is most important to the global financial markets is the GDP picture, because that really answers the question of, well, when is China going to start buying more copper, more coal, more whatever, and that is what drives economies, such as Canada and Australia and stocks such as BHP Billiton or Vale from Brazil.

The other one is more of a concern, in the short-term, for investors in China because you don't want to buy a company that is suddenly going, "Oh well, you know the profit growth we are telling you about," and it leads us to have a 25, 35, 40PE, well, that is just not going to materialize.

If you are looking at that, two different pictures here. Over the long-term, these pictures have to come together. In the short-term, you can get lots of economic growth with not much profit growth, because GDP doesn't care whether the growth is profitable, but over slightly longer-term, it does really matter because, if you are not generating a profit, the investment people stop investing, GDP growth does indeed slow, and your stock market does indeed start to take a tumble. That is really where we are.

I think in the short-term, which I would say through November, when we have a series of important Communist Party meetings, I think the official numbers are going to emphasize GDP growth. They are going to emphasize keeping that growth going by increasing lending as much as possible. We had a big upsurge in lending in August, most of it through the shadow banking system, rather than the official banks, but I think all of this will continue to keep the focus on GDP growth, good GDP growth numbers from the official sources through November, so that the meetings go really well. After that, I think you are going to see then, worries about how sustainable this is, maybe is the Peoples Bank of China going to tighten again, and a look at corporate profits, and then the same China, not a whole lot of difference change, but people will start looking at different numbers and the picture will look very, very much darker.

This is Jim Jubak for the MoneyShow.com video network.

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