The China super cycle is over. China will still grow at a heady pace, but I believe the torrid growth rates of 10% plus are a thing of the past.
In October of last year, I described that a new cycle was starting. Among several characteristics of the new cycle were two related to emerging markets. First, there was the prediction that inflation in emerging markets would fall. This call has now proven to be spot on.
The second call was that growth in emerging markets would slow. GDP numbers from several emerging markets show that this call was also spot on. Now there is confirmation from China. Wen Jibao, Prime Minister of China, has just lowered GDP growth target to 7.5%. This is the first target that is less than 8% since 2004.
The new target for inflation is 4%. Inflation in China peaked at 6.5% last year. China has three big transitions ahead. The first is the transition from a primarily export-oriented economy to one with more domestic consumption. Second is a transition to a younger generation of leadership. There are no open and free elections in China, therefore, how the transition takes place becomes critical. China does not have a long history of smooth transitions in leadership.
Wen Jibao is stepping down. China is ruled by a nine-member politburo of the Communist Party. Seven members of the politburo, including President Hu Jintao, are scheduled to step down.
Third, the big government stimulus money is about to run out. Most of that money has gone into infrastructure development. As the stimulus money disappears from the economy, infrastructure development will slow considerably.
Here is the breakdown of the indicators for the short-term:
- Economic Indicators: Negative
- Fund Flows: Negative
- Commodity Price Movements: Mildly Positive
- Relationship Between Currencies: Negative
- Sentiment: Neutral
- Earnings Momentum: Mildly Negative
- Risk Appetite: Neutral
- Quantitative Indicators: Negative
- Technical Indicators: Neutral
- Geopolitical Indicators: Negative
Aggressive investors can consider short-selling China and hedging it with long positions in other related emerging markets with more favorable short-, medium- and long-term ratings.
ETFs of interest are iShares FTSE China 25 Index Fun FXI -0.03% , ProShares Ultrashort FTSE China FXP +0.39% , SPDR S&P China ETF GXC -2.13% , ProShares Ultra FTSE China 25 XPP -5.46% , PowerShares Dynamic Mid Cap , EGShares China Infrastructure E CHXX -1.78% , Global X China Financials ETF CHIX -2.90% and Guggenheim China Real Estate ET TAO -1.18% .
