China’s exports last month were 15% lower than in March 2014 and imports also declined significantly (-12% versus a year earlier). China will release its estimate for its first-quarter GDP on Wednesday, and these trade numbers are serving to dampen expectations for that figure.
What does this mean?
China has been growing at an exceptional pace for the past two decades, but its rate of economic growth slowed last year and is expected to slow further this year to a target growth rate of “around 7%.” It appears that even that number might be difficult to achieve. Exports are a key component of GDP and such a significant decline speaks to the relative difficulty that China is now having in selling its products overseas.
Why should I care?
China’s economy, of course, has a huge impact on the global economy and a lower growth will lead to a lower growth in other economies, which is generally bad for stocks. Some fear that China’s huge growth in recent decades, and in particular its significant debt-fuelled growth of the past seven years, has left it vulnerable to an economic crash. Instead, the government is aiming to manage a transition to a more stable, domestically driven economy. This necessitates a slower long-term economic growth rate and a relative decrease in the contribution of exports to its GDP. The challenge for the government is managing this change without bringing upon an economic depression. The government does have the ability to cut interest rates further and enact other accommodative policies, which it will likely do. Chinese stocks have already performed exceptionally well this year, as it has become clear that the government will employ such policies; it is possible that they have further to run, but investors should also be cognizant of the risks of a worst than expected Chinese economic slowdown.
Originally posted as part of the Finimize daily email.
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