Market Overview

Is China's Explosive Growth Drastically Slowing Down?


One of the few pillars of the global economy is China. Over the last two decades, China has slowly increased its output in multiple ways. By growing its GDP, trading activities, production capacity, and civilian prosperity, China has climbed the world ladder to become one of the major superpowers.

On the other hand, some investors are nervous that China's explosive growth may be slowing down. If it does, economies across the world could be adversely affected. In order to figure out what may happen, it helps to analyze particular facets of the Chinese economy.

The consumer retail sector is one of the few sectors that can help investors identify subtle macroeconomic trends. For the most part, consumer retail companies are driven by consumer demand. In bad economies, private citizens tend to spend less money, while in good economies, they are unafraid of spending more. As such, certain economic data based on consumer retail trends can help investors map out the general economy's future.

This afternoon, the Chinese Consumer Price Index will come out and let investors know how the consumer retail industry is doing. Consumer retail includes companies such as Wal-Mart (NYSE: WMT), Travelzoo (NASDAQ: TZOO), and Sears (NASDAQ: SHLD). These companies essentially reflect how the average Korean business is modifying its prices to accommodate consumer demand. Chinese CPI can be analyzed similarly to American CPI.

Positive CPI indicates that companies are charging consumers more than previously thought, even in the face of uncertain economic times. Ultimately, it signals that consumers are able to pay more for the same goods. This indicates to traders that things may be better, after all, and tends to move the equity markets higher. In pre-market trading, the currency will move higher along with equities as well.

This afternoon, traders will be looking for the Chinese CPI to surpass an estimate of 4%. If the number is greater than the estimate, the Chinese RMB will immediately move higher, and barring unforeseen European news or other macroeconomic news, will set the stage for the Asian equity markets.

Long-term investors should also keep in mind the CPI from the prior period, which was 4.2%. The CPI number comes in every month, so long-term investors should keep track of monthly snapshots of the consumer retail sector. Any aberrations or sudden drops could mean that consumers are getting skittish about the economy and are refusing to spend money on items not deemed necessary.

Investors should also keep in mind that the holiday season may artificially bolster trends. If investors see a sudden drop in January CPI, they should not assume the economy is extremely bearish. However, if investors see a sudden drop this afternoon, then there may be underlying problems affecting consumer retail.

Consumers have a few options when it comes to understanding the global economy. The CPI number is one indicator that could help investors gauge where the economy is heading into the future. Investors should also keep up with the major news on a real-time basis to stay on top of major developments that move markets.

Follow me on Twitter at @MakinMarkets


Bullish View:
Traders who believe that Chinese CPI will be positive might want to consider the following trades:
  • Long Asian equity futures by purchasing shares or call options. If you go with the options strategy, you could purchase a straddle just to reduce risk associated with the bet.
  • Short the US Dollar Index against another currency like the Japanese Yen. Asian currencies are likely to move higher.
  • Long the Hong Kong Dollar against the US Dollar, which will obviously move higher if the CPI is positive.
Bearish View:
Traders who believe that Chinese CPI will not be positive may consider the following positions:
  • Short Asian equity futures. The futures market typically relies on technical analysis for entry and exit points, so identifying the next support level may be useful.
  • Long the Dollar Index, which is likely to move up if equities go down. US equities move down if Asian equities show weakness.
  • Short the HKD against the dollar, which will go down if the Chinese economy does not seem as positive as expected.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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