Why Investors Should Be More Concerned About the Chinese Economy

By Michael Lombardi

I told you so.

According to the National Bureau of Statistics, the Chinese economy grew at an annual pace of 7.5% in the second quarter of this year from a year earlier—down from 7.7% in the first quarter. (Source: Bloomberg, July 15, 2013.)

Regular readers of Profit Confidential shouldn’t be surprised by that; I have warned about the slowing of the Chinese economy many times in these pages, and I continue to expect more weakness ahead. In fact, what we have seen so far might just be the tip of the iceberg.

While some might say that 7.5% is a decent amount of growth when comparing it to the gross domestic product (GDP) growth in countries like the United States, for the Chinese economy, it’s embarrassing. It’s well below its historical average growth rate.

And that’s not all. Earlier this year, the Chinese government set a target for GDP growth of 7.5% for 2013 and an even seven percent through to 2015—so what we are witnessing now is here to stay for some time.

Keep in mind that the International Monetary Fund (IMF) expects the Chinese economy to grow 7.8% this year—that’s a lowered expectation from April. And The Goldman Sachs Group, Inc. (NYSE/GS) and other major banks, like HSBC Holdings Plc (NYSE/HBC) and Barclays PLC (NYSE/BCS), have all reduced their forecasts for the Chinese economy. They expect China’s GDP to grow 7.4% this year—the worst growth rate for the Chinese economy since 1990.

What many don’t realize is that a slowdown of the Chinese economy has many global consequences. It will send ripple effects into the global economy. More problems will emerge in the short term as the second-biggest economy in the world slows.

Consider Australia, for example. In recent years, its economy has benefited significantly by exporting raw material to the Chinese economy. Now, the tides are changing, and Australia’s GDP might be in trouble. Australian Prime Minister Kevin Rudd said: “The truth is that the China resources boom is over.” The unemployment rate in Australia has reached a four-year high of 5.7%. (Source: “China Slump Ripples Globally,” Wall Street Journal, July 15, 2013.)

And Australia isn’t the only economy affected by slow GDP growth in the Chinese economy. Here’s what the Deputy President of AgriSA—a farmers’ association in South Africa—said of China: “We are more and more dependent on how their stomachs turn when they get out of bed in the morning.” (Source: Ibid.) Any more slowdown in the Chinese economy will result in a greater impact on South Africa’s economy as well.

Of course, we in North America are no different. Any slowdown of the Chinese economy would result in significant problems for the U.S. economy as well. For example, we export airplanes and computer goods to the Chinese economy. Slow demand from China will yield lower profits for companies in those and many other industries.

I still see too much optimism in the markets as the problems from the slowing Chinese economy are starting to creep up to the surface. As it stands, the key stock indices are rising because many investors apparently think bad news is good news.

I remain skeptical of the performance of the key stock indices as GDP in China is slowing, countries around the global economy are facing an anemic economic future, and the U.S. economy continues to be in a period of dismal growth.

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