What's Next for China's Growth?

01/27/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

As concerns over China's growth spook the global markets, MoneyShow's Jim Jubak looks at one of the key concerns and questions how long before they turn things around.

The worry about China goes on, and basically, right now, that worry is a big enough deal so that it is driving emerging market stock prices and driving them down. It is driving the Japanese market and driving that down, that then is slopping over, and on most days, it is also driving down Europe and the United States. Here is the representative story for this kind of stream of worry. This is from January 23.

We had a report from China of what is called the flash reading on the PMI, that is the Purchasing Managers Index from HSBC and Market Economics. These are two private companies that do their own and look at what purchasing managers are thinking. It is equivalent to the US Index. We get the official read a couple of weeks after that, usually. What they reported was that, for January, they were seeing a drop down to 49.6 from 50.5 in December. It does not seem like a big drop, nine-tenths of a percentage point, but on this index, anything below 50 indicates that a sector, or the economy as a whole, is contracting, so the drop from a little over 50 to a little under 50 just fed right into worries that the Chinese economy is indeed going to contract in 2014. It is not going to make the official growth rate, which, in 2013, was 7.5%. We do not yet have the official target for 2014, but you are getting a lot of evidence that the Chinese economy is slowing. You have had big scares about liquidity and all this is leading into a story that basically says, “Hey, there are real worries.”

Now, in some circumstances, Chinese stocks, and you are looking at the Shanghai Index, Composite Index, down about almost 10% from the middle of December. That might be enough to get a bounce, but you have another thing going on, which is, you have this big worry about bad debt problems, particularly problems in the financial sector, a part of the financial sector called shadow banking. This is not the regulated banking industry. This is a lot of trust companies, bank spin-offs off the balance sheet, financial entities that are designed by banks to enable people to get higher returns than the banks can offer in regulated markets, and yet these are structured so they are vehicles that do not go on the bank balance sheet. You have stories out that one of a fairly decent-sized trust, not huge, but about $400 million, is in trouble, and the initial story is that the bank just sort of connected to it, the Industrial Commercial Bank of China connected, because it is an off balance sheet entity, so it is a kind of tenuous connection, that they are not going to bail out investors.

These are people who put money in this with the idea that it was somehow connected to the bank, so they were probably safe, but they were getting a higher yield, so this is a big deal, because there is a lot of this money going around out there. Shadow banking provides about somewhere around 30% of all credit in China at the moment. If this starts to decay, no one knows what is going to happen, the government would have to step in and it would be a big deal. The story about one of these companies, raises fears about all of them and that is kind of the background for a slow down in the growth rate, because if the economy slows, the fear is that these bad debts will grow and you will have more of these companies winding up in trouble. That is sort of why I do not think you are going to see a bounce very quickly in Chinese stocks, unless they get a whole lot cheaper, or else we get somewhere like June, where it looks like the Peoples Bank has decided that it is going to start expanding money supply instead of shrinking it.

This is Jim Jubak for the MoneyShow.com Video Network.

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