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Global Economic Growth, China Eases the Way

Economics / China Economy Jun 12, 2012 - 12:39 PM GMT

By: Frank_Holmes

Economics

Best Financial Markets Analysis ArticleFollowing negative data last week, investors were clearly concerned about global growth and anxiously anticipated government actions. While Europe and the U.S. disappointed investors, China surprised on the upside by cutting interest rates. The market reacted positively, as the S&P 500 Index increased 3.7 percent.

It's clear the government's tone in China shifted this week with the rate cuts. The government appeared to be comfortable with slower growth, but that position seemed to change as the country took steps to avert a hard landing and cut interest rates to stabilize the economy.


Over the past decade, there were only two periods when the government reduced rates: once in 2002, and several times at the end of 2008. This time, rates were cut by 25 basis points each on lending and deposits. The one-year benchmark deposit rate is now 3.25 percent and the 1-year lending floor rate is now at 6.31 percent. Historically, easing rates have been positive for the MSCI China Index.

Chinese Easing Cycle Bullish for Chinese Stocks

As we often say at U.S. Global Investors, government policy is a precursor to change. While there has been quite a bit of negative news lately, government policy is making a significant step toward growth. We believe now's not the time to be bearish.

Analysts are only beginning to see signs of increased infrastructure spending, which should help spur growth for the remainder of the year. If you'll remember in 2011, China deliberately tightened its credit policy to stem inflation and slowed financing to local governments, says J.P. Morgan. As a result, fixed asset investment growth in infrastructure decelerated considerably, and railway investment was completely halted, decreasing nearly 20 percent on a year-over-year basis during the second half of 2011, says J.P. Morgan.

The decline in infrastructure and real estate investment on a year-over-year percentage change is clearly seen in CLSA's chart, and it's what Andy Rothman has attributed to slower growth in the world's second-largest economy:

two Reasons China's Economy has Been Slowing

Highway infrastructure spending "increased sharply" from January through April, particularly in Western China, says J.P. Morgan. The research firm says that the economic growth rates in the Central and Western areas of the country "already outpace those of more developed coastal provinces." Fixed asset investment for infrastructure, energy development and water projects in the Central and Western regions has grown at a faster clip than in the Eastern region on a year-over-year basis.

Rail infrastructure has also picked up. As of the end of 2011, the Ministry of Railways received a credit line of more than $300 billion from banks, and plans on issuing additional railway bonds, seeking investments by pension funds and encouraging the private sector to invest, says J.P. Morgan.

With fixed asset investment in the rail sector growing 34 percent on a month-over-month basis, this government support is "starting to be translated into action," says Macquarie Commodities Research. If we see spending in railways continue to increase, China will be able to meet their full-year target, according to Macquarie.

China's GDP during the second quarter is likely to be about 7.5 percent, and the expectation for 2012 remains at 8 percent. While the country's GDP is lower than its 2010 high of 12 percent, it is helpful to put this in context with global growth. "Comparatively, it looks like strength--not weakness," reiterates ISI.

China's Growth Rate Still Tops World

What's important for investors to realize is that the combination of a ramp up in targeted fiscal spending combined with broad-based monetary easing is a positive dynamic not only for China--but for the global economy as a whole.

John Derrick contributed to this commentary.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

By Frank Holmes
CEO and Chief Investment Officer

U.S. Global Investors

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

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