One excuse I have read recently for the recent selling seen in the stock market is China's decision to slow down lending. (World Economic Forum says China slowdown is a global threat, The Australian--Patrick Hosking Jan. 16, 2010) If I recall correctly, China decided as an attempt to tap the brakes on their economic growth that their banks had to raise their reserves, which effectively would reduce the amount they have to loan. China appears to be worried about the possibility of an asset bubble developing. Although there are some different concerns in China, I doubt that their attempt to slow their economy will somehow send their economy reeling.
We have all witnessed firsthand the damage bubbles can inflict when they eventually deflate or pop. So, we can definitely appreciate the policies implemented by China to prevent such developments. Time will tell how successful those policies may or may not be, but to suddenly think that this will somehow derail China or the global economy seems to be overblown.
There are many concerns related to the health of the global economy, especially in the established industrialized countries. However, China made it through one of the worst financial recessions we have seen in quite some time. If China attempts to slow things down this does not suddenly mean that their determined growth model will suddenly stall. There are numerous issues there, such as their blended battle between a Communist Government and a somewhat more Capitalist minded economy. They seem to have severe pollution concerns and poverty struggles. Although their infrastructure building is fueling much of their growth, they still depend on the rest of the world to purchase their goods and when the rest of the world is sputtering along it definitely impacts their exports.
I believe that China placed extra focus on their internal growth model in response to slowing exports. This internal growth was evident by increasing housing prices and increased commodity demand. If somehow China experiences a slowdown worse than anticipated they will simply ramp up their internal engine again. They have plenty of time to wait for the global community to gain better economic health and thus increase their exports. China's export driven growth model is the reason they do not want to let their currency float. A higher currency would make their goods more expensive to foreign investors.
As with any fast growing country China has had, and is going to continue to have, corrections along the way. How can you argue with reports GDP growth in China is running annually at approximately 7-10% when other countries are struggling to gain positive growth? (China's GDP soars as it shrugs off global crisis, The Times online-Leo Lewis Jan 22, 2010.) As mentioned earlier, China's currency, if left to float, would arguably increase against other currencies, reflecting the underlying strength of their economy. Obviously there are those investors who choose not to invest there for political and/or humanitarian reasons. The only other argument to be made for not investing there, is determining how much growth is already "baked in the cake" relative to company stock valuations. If there are significant premiums built in, then any corrections will quickly bring those premiums down to a much more respectable valuation. If an investor can handle volatility, and is determined to ride out any storm, China seems to have many long term answers for those investors seeking maximum growth.
Daniel Petrey, CFO, MBA