Fisher Investments Editorial Staff
Emerging Markets

The Long March

By, 07/12/2010

Story Highlights:

  • Given fast growth and continued development—of both a large consumer base and infrastructure—fears of Chinese economic overheating or cooling are puzzling.
  • Chinese central bankers said Friday loan and money supply growth in the first half seemed "reasonable."
  • The only real changes to the picture are on the fringes—and don't impact the much more significant fundamentals.
  • China could do with some financial system modernization long-term, but appears on course for a robust 2010 and quite possibly well beyond.


During the Chinese communist revolution, Mao Zedong took his like-minded army on a 5,000-mile foot tour of western China—a perilous, terrifying trek dubbed the Long March. Today, China is still on the march—only this time it's toward rapid modernization and development. A journey still fraught with dangers—though generally, any journey that involves more imported cars and less foot traffic is inherently less perilous. A short month ago China reported 11.9% GDP growth with increased lending and money supply… and folks fretted—wouldn't China overheat? Then, growth rates of Chinese Leading Economic Indicators and Purchasing Managers' Index dipped slightly, and concerns quickly turned—too cool? But all the concern is puzzling—regarding China, not much has actually changed over the past year.

Reports throughout the period have continued to show growth, and expectations for 2010 GDP of 9% are far from slow, and that doesn't seem likely to change. On the coast, consumption driven policy seems to have taken a leadership role. And this week, China announced further infrastructure developments in western China—valued at approximately $100 billion. The only recent real changes to the growth story have been on the fringes—expected wage increases were larger than previously thought, second and third home purchases were restricted somewhat, and fear of an export slowdown related to Europe.

What about overheating? Friday, following its second quarter monetary policy meeting, China's central bank said money and loan growth in 2010's first half was "reasonable and basically appropriate"—seemingly reducing the probability of imminent rate hikes. The increases in lending and credit earlier this year seem like a normal early year surge (carry-over from 2009)—common in Chinese banking. Undoubtedly, there will be some bad loans made in the surge, but Chinese banks are still largely state-owned and, historically, periodic recapitalizations occur to account for this—four since 1998, the last of which is ongoing now.

True, China's financial system is in need of longer-term modernization to better control inflation. Free capital flows, fixed exchange rates, and control over monetary supply simply don't mix forever and create difficulty in attempts to control money supply. Thus, inflationary pressures require rather creative Chinese monetary methods (loan quotas, property restrictions, etc.) But these methods are far from perfect—and reform is likely needed long-term. Recent loosening of the yuan's peg to the US dollar is a baby-step in that direction.

Chinese growth is intact and likely on course for a robust 2010, and possibly well beyond. For all the concern about too hot or too cool, China's still a fast-growing Emerging Market with a rapidly developing consumer base, solid manufacturing and export industries, and infrastructure development that seek to bring more economic development for some time to come to those in need.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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