Mixed Signals on China

Folks at BlackRock and Barclays tend to think China is a good place to put your money. They note the GDP growth rate of 6.8% in the fourth quarter and expected government stimulus that will lead to a growth rate of 8% in 2009. Moreover, the Shanghai Composite Index was up an impressive 9.3% in January. That is impressive in comparison to the nearly identical 8.8% change in the Dow, though for the Dow it was in the other direction.

http://www.bloomberg.com/apps/news?pid=20601087&sid=annOAxmUmXNo&refer=home

As the linked Bloomberg article notes, the Shanghai Index was trading at 15.5 times reported earnings, versus 50 times reported earnings at the peak. That is low in comparison to where things have been, but is it truly that low in this environment? I tend to agree with the Chariman at Morgan Stanley Asia, who quite appropriately observes:

“Most of the juice in the Chinese growth results in the last five or six years have been export-led,” Roach said in a Bloomberg Television interview from Zurich. “How can an export- led economy lead the world out if its export markets are going south?”

Indeed, how can it? Seriously, if you know, please comment as I cannot see it. China's two biggest export customers, the EU and U.S., are not going on a spending spree any time soon (even though their respective governments are trying to stimulate one), so any expectation that China will just bounce back seems misplaced. China is indeed doing some things to support its domestic economy but this seems small considering its situation. We will see. I for one am not buying up shares of Chinese companies at the moment.

Let me add a couple more points to the equation. First, China computes its GDP a bit differently than we do. I noted this in some detail last week. As Nouriel Roubini pointed out, if it computed GDP the same way we do, its fourth quarter GDP would be pretty much zero. Moreover, given the 9% growth for the year, a 6.8% growth rate in the fourth quarter, even by China standards, suggests a serious decline late in the year. So any growth forecast tied to the China fourth quarter GDP is perhaps misplaced.

Second, the evidence of what is happening in China does not show the economy there being quite so rosy. Times Online had a nice detailed piece today on how the economic decline there is causing some significant social strife. They give plenty of examples of what is taking place. China is suffering with the rest of us and likely is or soon will be suffering much more. Accordingly, I think the folks at Barclays and BlackRock need to take another look.

http://business.timesonline.co.uk/tol/business/economics/article5627687.ece

Disclosures: None