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Is China Poised For More Growth?

In here, we take a look at global economic updates or interesting key developments that investors can take note of. This week brings me to China.

After decades of runaway growth at break-neck speed, China seems to have slowed down: In 2010, China’s annual Gross Domestic Product (GDP) increased at a 10.5% clip; in 2013, the figure was ‘just’ 7.7%.

China’s slowing growth

There are two main sources for the decline in growth: One is China’s property market, which is facing excess supply and falling prices; the other is the increasing indebtedness found within the country. Regarding the former, here’s how The New York Times described it in June this year:

“China’s average home prices fell for the first time in two years in May, data showed on Wednesday, and price weakness spread to more major cities, adding to signs of cooling in the property market.”

And regarding the latter, here’s an example of the extent of the problem as recounted in a recent Wall Street Journal article:

“Local government debt rose 20% annually from 2010 to 2013, the World Bank says, while China’s corporate-debt-to-GDP ratio at around 125% is among the highest in Asia.”

But here’s some good news: According to very recent data from the National Bureau of Statistics of China, the country had experienced a 7.5% increase in Gross Domestic Product (GDP) during the second quarter of 2014. That’s a tad higher compared with 7.4% in the first quarter.

The slight pick-up in growth, if sustained, puts China on the right path toward achieving its target of a 7.5% increase in GDP for 2014.

To bring even stronger firepower to its fight against slowing economic growth, the Chinese government has taken up several stimulus measures to fuel growth and these include a reduction in the bank reserve amount, higher bank lending, hastening of public housing and railways construction, and ordering regional governments to hasten their spending. In short, China is banking on an expansion of credit and government spending in order to try and get its economy moving even faster.

Foolish Opinion

While China seems to be on the right track for now with a slight uptick in growth in the second quarter of 2014, there is still need for more measures to be taken up if China is to meet its 2014 target of a 7.5% increase in GDP. For instance, in the property sector, it remains to be seen if the sharp turnaround in June is sustainable.

In addition, the government has been trying to change the focus of the country’s economy from an export-driven to a consumption-driven one. Bear in mind that this change would be happening after the country had experienced a tremendous and prolonged increase in economic activity due to years and years of being a manufacturing haven. Can the switch be a success? That’s a tough one to answer.

But in any case, Singapore-listed companies with extensive operations in China – such as Cosco Corporation (SGX: F83) and Straco Corporation (SGX: S85) – may stand to benefit if the Asian Giant manages to reshape its economy and rev up its growth engine again.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.