The Chinese Premier, Wen Jiabao, recently announced a reduction in China’s economic growth target. For the first time in nearly a decade the Asian powerhouse is cutting its growth target. For investors, what does investment in a China with lower growth targets really mean? Does this pronouncement fall in the realm of hard facts or is it for political consumption? Taking the Premier’s words at face value we can be led to believe that China is looking for more sustainable growth and stability. No matter how fast China’s economy has been expanding, it cannot expect to continue at the current pace, based on exports, forever. The pending recession in Europe brings the issue to the fore. If China expects larger and more established economies to pay for its growth through Chinese exports there is a logical end in sight that simple fundamental analysis will reveal. As China grows its need to export exceeds the needs of other nations in the world for Chinese products. China will need to redirect investment internally in order to sustain a high level of growth. It will need to use some of its foreign currency reserves to pay for infrastructure projects in order to maintain employment and economic growth. If this is to be the case where will the investor look for investment in a China with lower growth targets?
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Another aspect of investment in a growing China or investment in a China with lower growth targets is the lack of transparency in the Chinese system. Chinese leaders may well have decided that they need to reduce their rate of growth in order to avoid the collapse of a true real estate bubble. They may fear that excessive growth will end in an economy-damaging crash. But, despite pronouncements of Chinese leaders the country and its companies have a history of being less clear and forthright than North American, European, Australian, and other investors would like. Thus it is uncertain whether China will really see a drop off in its economic growth rate this year or if the newly proclaimed growth target is simply an anticipated floor above which China will proclaim a higher rate of growth. Profitable investing requires a profitable investment timeline . If one has just purchased stock in a Chinese company one hopes to see ongoing growth in a thriving economy. If growth falls off investors may shy away from investing in China. However, remember that a reduced growth rate is not a recession. If China’s growth rate falls to eight percent or so it beats anything in the Americas outside of Panama.
In the end, investment in a China with lower growth targets may lead to a different set of investment opportunities. Current problems in China include whole cities that have been built but are waiting for inhabitants, unrest in the interior when lands are taken over by developers without due compensation, and the sort of environmental damage that it took decades for the USA and Europe to take care of after their rises to economic dominance. All of these assume, however, that investment in a China with lower growth targets will not end up being investment in an economy that is due for a burst real estate bubble and collapse of their banking system. Direct investment in China may still be lucrative but investment in a China with lower growth targets might be tricky.
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