European and US markets, which had already posted getting on for six weeks of losses, went into a tailspin on June 10 when it became clear that China’s growth had slowed. What the markets did not pay too much attention to, as they dived off the price cliff like a shower of lemmings, was that this shock horror slowdown from China was a pull back from the first quarter’s overheated 11.9% growth to a still frenetic 10.3% for the second quarter of 2011.
How exactly does growth of the order of 10.3%, when China’s recently announced 5-year plan calls for lower and more sustainable growth of around 8%, amount to something that accelerates the depression of stock markets in advanced economies? The logical reaction would surely have been to celebrate the fact that China’s growth is still way north of 8%. But then markets are not always logical.
What everyone fears, of course, is that a Chinese slowdown will cut demand for commodities. Yet this too flies in the face of reason. Commodity prices have been overheating precisely because of the way China’s overheated economy is sucking in commodity imports at an enormous pace. Some backing off should be welcomed as generating space for commodity prices to shed some of that inflationary momentum.
The other thing that is scaring the markets about China at the moment is that the world’s second-largest economy is in the process of winding down the $586 billion stimulus spending it uncorked as its policy response to the global crash. Chinese authorities also want to stem the flood of easy credit from China’s banks in order to get a grip on inflation, which is threatening to get out of hand. Far too much bank lending has gone into fuelling a speculative building boom, which is now raising the spectre of bad loans coming home to roost.
All of this speaks to a slowdown and with advanced markets in a parlous way, with the recovery showing increasing signs of fragility, some twitchiness in markets is understandable. However, twitchy is one thing, skittish as a kitten is something else. Growth of 10.3% does not bespeak the end of growth in China. If anything, it is way ahead of where it should be if the Chinese government is going to edge towards a more sustainable growth strategy – and markets should be welcoming this, not fleeing for the hills.
The problem, as always, is that when a fund manager looks at an index that has suddenly started to dive he or she is immediately on the horns of a dilemma. If it is merely one of the endless jitters down and up that any daily pricing graph wanders through, it can be ignored. If, however, the downward dive is the signal that the market is going to go into a major pull back, then continuing to hold a long position in a whole bunch of stocks, particularly those heavily predicated on strong growth from China, no longer looks that sensible. After all, if you take the case of Japan, the old mantra that markets always bounce back falls flat on its nose. The Japanese index is still well down from its high point decades back. So if China is going to have a major growth hiccup, selling makes sense. The only problem is that if a whole bunch of long-only managers turn into sellers simultaneously, they drive prices down still faster and the market turns into a train wreck.
Right now, as we start the second week of June, the markets seem to be nicely poised on the brink. The FTSE has pulled back from a confident nudging above 6000 to a weak-kneed mid 5700s and the S&P is way way down for six weeks on the trot and falling further. Additional shocks to the system are not going to go down well...
Further reading on the Chinese economy and growth:
- China and the Global Financial Crisis, by Linda Yueh
- Stability Proves Testing for China, by Matthew Gertken
- The IMF ponders China’s growth, by Anthony Harrington (blog)
Tags: China , GDP growth , investment , Japanese stocks , S&P Index , US markets