Proving that emerging markets are not entirely immune to what is happening in the US and European economies, China is experiencing its slowest growth rate since the financial crisis in 2008.
China, the world’s second largest economy, just reported weak trade activity in August. According to The Los Angeles Times:
“Imports fell 2.6% from a year earlier after growing 4.6% in July, underlining China’s softening demand for commodities and raw materials. Exports grew 2.7% from a year ago, up slightly from 1% growth in July.”
The Shanghai Composite fell to a new low of 2,033 on Thursday, which is 20% down for the year and 67% below its peak of 6,124 from 2007. Chinese energy consumption is also on the decline. In response to this downturn, Barclays Capital has downgraded China GDP from 7.9% to 7.5%.
There is a risk that China’s struggling economy will further drag down the global economy. The New York Times reports:
“The burden of pulling along world growth while the major advanced economies continue to post anemic growth and remain in a state of policy paralysis has clearly taken its toll on the Chinese economy. Moreover, many emerging markets and even some advanced economies that rely on commodity exports have been riding on China’s coattails during a difficult period in the world economy. Thus, China’s growth is seen as a bellwether of an even rockier period ahead for a global economy whose recovery has stalled.”
China: Risk or Opportunity?
So, what does all this mean for investors? Ann Lee, a contributor to Forbes, believes that China’s downturn could translate into a great time of opportunity for investors:
“China’s ability to serve as a continued engine for world economic growth should continue for many years to come since the service sector is still nascent and has much room for improvement. This should be great news for investors scouting for bargains during times of depressed valuations and heightened uncertainty in the Chinese market. It should also be welcome news for citizens around the world who are looking for the next leg of global growth.”
Others, like hedge-fund manager Patrick Wolff, are less bullish. In an investor letter detailing his Grandmaster Capital Fund’s second-quarter performance, Wolff wrote, “We think it will become apparent over the next several years that China’s economic goose is cooked.”
While Jim O’Neill, Chairman of Goldman Sachs Asset Management worries that the slowdown in China and the rest of the BRIC bloc is more troublesome economic news than the eurozone crisis.
China Invests in the U.S. Economy
If there is one clear area of growth, it is Chinese capital invested in acquisitions of US companies, which, according to a recent article in The Los Angeles Times, has doubled in 2012.
“Facing a sharp economic slowdown at home, Chinese companies are plowing money into U.S. assets at a record pace, making huge bids for American energy, aviation, entertainment and other businesses. The increase in investment is already at least $8 billion this year.”
According to Barrons, “Emerging markets are expected to power 60 percent of the world’s economic activity by 2030 and have become synonymous with growth.” But, as China faces a soft landing, investment in its economy becomes a riskier venture.