Chinese GDP surprised to the upside as the government reported 10.7% growth. Analysts had been expecting 10.5% growth. The data was met with mixed reactions. While the growth is certainly encouraging there are increasing fears of overheating as consumer prices increased 1.9%. Stocks in the region were mixed on the news as Japan closed 1.2% higher while stocks in Hong Kong were down 2% and the Shanghai Composite closed higher by 0.22%. Howard Gorges, vice-chairman at South China Financial Holdings believes it is a sign of overheating:
“It does show that the economy has gone full steam ahead and that the government may be trying to rein it in. If it continues to look too strong, the banks might see another increase in their reserve requirement ratio. The markets are expecting that to happen sometime soon.”
Others are not so certain. Cao Xuefeng, a stock analyst at Western Securities says much of the concern in the market is not warranted:
“This set of data, in my view, will not be enough to push the central bank to raise its benchmark deposit and lending rates ahead of time.”
Bubble chatter is growing in investment circles. I don’t think we’re at bubble levels quite yet. The Chinese have perfected their own form of western Capitalism over the course of the last 25 years and have done so with a great deal of prudence. Unfortunately, I think they just recently pulled the wrong page of the playbook with a Keynesian stimulus approach that is appearing entirely unnecessary. While we’re not in bubble territory quite yet, it’s difficult to imagine that their central bankers will fare any better in their attempts at controlling the uncontrollable business cycle, than our own central bankers have. For the sake of the global economy, let’s hope they don’t overstay their welcome at the liquidity spigot. A bubbly downturn in China is the last thing the global economy could handle right now. Unfortunately, like the central bankers who fail to control the business cycle, that might just be impossible.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.