Chinese economy slowing down and rebalancing

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What's going on?

The latest release of data from China seems to confirm that the Chinese economy is in fact slowing down. Economic growth in the first quarter of this year was at the lowest level in six years. Growth in physical investments was at a 14-year low and growth in retail sales was at nine-year low. Growth in factory output for March was surprisingly low.

What does this mean?

The slow-down fits into a bigger picture of rebalancing the Chinese economy. Historically growth came from investments, but in the future growth will come from consumption. China is simply becoming a more developed economy. There is no longer a need to invest as rapidly as before after years of adding factories and infrastructure. Growth will now come from the shopping habits of the burgeoning middle and upper classes. There are concerns that the rebalancing could be too sharp. Old growth could disappear before the new growth shows up. The void could lead to knock-on effects like unemployment and defaults on mortgages. This could be bad news for a fragile Chinese economy with high debt levels. To fill the void and ensure that growth continues, the central bank has lowered interest rates and the government plans to invest in infrastructure.

Why should I care?

The Chinese economy is becoming increasingly important to the global economy. Chinese residents would be affected directly. People in emerging markets would be affected because China is driving growing demand for all types of commodities. But the developed economies would be affected as well. Established companies are becoming more reliant on China for its profits. As an investor, there are two levels of analysis. Who is affected by lower overall Chinese growth? Probably most companies, but in particular commodity firms that have benefited from booming demand for resources. The second question is how the rebalancing itself will affect companies? Here you could consider whether industrial companies providing construction services and electrical infrastructure might be impacted by lower growth. On the other hand, sellers of products might benefit as the burgeoning middle and upper classes in China adopt Western shopping habits.
Originally posted as part of the Finimize daily email.

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