World Bank Suggests Investor-Friendly Changes to Stabilize Chinas Rocketing Economy
By Mike Caggeso
Staff Writer
A slew of cold-hard statistics came out of China yesterday (Wednesday), reinforcing the nation’s need to manage growth, interest rates and inflation.
- The World Bank’s quarterly report said China’s GDP is expected to grow a staggering 11.3% in 2007 and around 11% in 2008.Â
- Its CPI index (the bellwether for inflation) rose 6.5% in August, well above the central bank’s target of 3%. It marks the highest monthly gain in 11 years, the National Bureau of Statistics said.
- Retail price of pork rocketed 77.6% in August from the price a year ago, according to data from the National Development and Reform Commission. The price of chicken rose 29.4%. Eggs were up 25.5%. And the average price of vegetables rose 17.1%.
- Prices for houses in major Chinese cities shot up 8.2% in August compared to prices a year ago.Â
- Also in August, retail sales in China were up 17.1%, according to the National Bureau of Statistics.
- And between January and June, the computer sector was up 14% and home electrical appliances sector went up 12%.
These statistics are both great and startling for Chinese government, which is in the sticky position of trying to rein in a runaway economy that doesn’t want to slow. Curbing inflation alone has been a busy task, as the benchmark interest rate has been raised four times this year. And a Goldman Sachs economist expects two more by the end of the year.
That’s not very far-fetched, as the 27-page World Bank report warns that if the Chinese economy doesn’t balance itself, it runs the risk of being dangerously lopsided. And it outlines specific ways to shift growth and spread it around without impeding it:Â
“The government wants growth to become less resource intensive, cleaner, and more equally shared. This requires a change in the growth pattern with, on the production side, more growth of the services sector instead of industry, and, on the demand side, a larger role for consumption instead of investment and exports. Such a shift would also make growth less capital intensive, allowing China to grow with lower saving. Moreover, it would mean more labor-intensive growth, with more urban employment creation and less rural poverty and less urban-rural inequality. Besides being desirable in their own right, measures that support rebalancing also help reducing the external imbalances.”
Investing With ‘Change’
Investors should welcome such a change in direction because it opens the door for investor-friendly, service-sector veterans to tap China’s buying power — from cell phones to fast food. And it will stabilize China’s overall economy while allowing it to continue its growth – taking away much of the emerging-market volatility that scares many investors away.
Companies that could benefit from some of these powerful trends:
- China Mobile Ltd. (NYSE:CHL) has been tearing up its domestic competition, with its stock dialing in near triple-digit gains in the past year.
- As the Summer Olympics boost China’s 2008 tourism, China Eastern Airlines Corp Ltd. (NYSE:CEA) stands to receive a good chunk of business. The same goes for China Southern Airlines Limited (NYSE:ZNH).
- Yum! Brands Inc. (NYSE:YUM), a fast-food and restaurant outfit that owns KFC and Pizza Hut, has been pushing hard into mainland China. Seeing this, McDonalds Corporation (NYSE:MCD) is ramping up its China development.
Should China take the World Bank’s suggestions to heart, growth will slow in certain areas and accelerate in others. And investors have to keep close watch because opportunities via policy change can hide under headlines that highlight the country’s overall growth.Â
But either way, the U.S. investors still face many obstacles in their ability to invest directly in China, making most plays on China indirect, from ETFs to Mutual Funds. That also includes commodities.
