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China Ascendant Despite Slowdown

By Yiannis G. Mostrous on March 8, 2012

In early November, we warned investors to prepare themselves for the possibility of slower growth from China. At the time, China’s latest Five-Year Plan from 2011 to 2015 targeted annual gross domestic product (GDP) growth of 7 percent, a moderate decline from the heady growth of the past five years.

Because the Chinese government is not shy about telegraphing its intentions in advance, it’s rather perplexing that the market was surprised by Premier Wen Jiabao’s announcement on Monday that China had lowered its GDP growth target for 2012 to 7.5 percent.

Though the usual China skeptics reveled in this news, the new GDP target does not change anything with regard to China’s long-term growth story. The precise rate of China’s GDP growth from one year to the next doesn’t matter too much as long as its economy remains on a trend toward long-term sustainable growth. And for China, that is still the case.

Of course, just because the Chinese government has set a lower target for GDP growth this year doesn’t mean that it will do everything in its power to stop growth from surpassing this target.

Although this is the first time in the past eight years that the growth target has been set below 8 percent, history shows that a higher growth rate will be welcomed as long as it dovetails with the government’s efforts to spur domestic growth.

As such, we reiterate our prediction that the Chinese economy will grow at 8 percent this year, once again exceeding the government’s official target.

The main reason for this assessment is that the Chinese economy has entered 2012 with strong momentum, and only a substantial shock to the global economy could derail this momentum.

Secondly, this announcement also seems to be a message to China’s local governments that excessive risk-taking in the name of growth will not be tolerated. Over the past year, China has undergone a number of changes in leadership at the local government level, so Beijing is simply reminding these new leaders to respect their authority.

Indeed, a number of these new local government officials have been eager to demonstrate growth and have announced local GDP growth targets close to 10 percent this year. That is not only undesirable for long-term sustainability, but also unattainable given the uncertainties plaguing the global economy.

Finally, a lower GDP target suggests that although the government will support continued growth, it will not pursue that growth with an extensive stimulus package while the Chinese economy remains on a relatively solid footing.

Instead, selective and gradual easing will take place in a manner to avoid an overheated economy while not choking off growth. This mirrors the government’s recent effort to cool its real estate sector.

Although the market may be roiled by such efforts in the short term, we remain long-term investors in China.

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R.I.P Bull Market—Here’s How To Protect Your Wealth

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