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Stocks Fall After China Lowers Growth Target

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March 5, 2012 11:09 am
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Stocks Fall After China Lowers Growth Target

China is lowering its economic growth target to an eight year low, so that it can focus on increasing domestic demand and prepare for next year’s leadership change. Chinese Premier Wen Jiabao said that his 2012 growth target of just 7.5 percent would allow Chinese officials to increase their efforts to boost Chinese domestic demand, while making the country less dependent on exports and foreign capital.

The lower economic growth rate will also make it possible for China to make price control reforms without driving inflation up, which will allow the government to maintain an expansionary monetary policy that will allow small and medium sized businesses to get the funding they need in order to grow. China expects money supply to grow 14 percent in 2012 and will maintain its official inflation rate target of 4 percent this year.

It’s worth noting that China’s economic growth targets usually serve as a goal to surpass, rather than one to meet. So if China were to simply meet its 7.5 percent growth rate this year, the markets could react as if China missed its target.

Although China has consistently met its economic growth targets with relative ease, inflation has been another matter. Inflation has been one of China’s biggest concerns for years because rising prices negate the benefits of a growing economy to the Chinese people. Much of last year was spent trying to tame inflation that China’s leaders worried could lead to widespread unrest. After inflation began to cool and signs of a possible economic slowdown emerged, Chinese officials were able to change their priority to promoting economic growth towards the end of last year.

Chinese Premier Wen Jiabao’s announcement that his government would lower growth targets in order to focus on reforms and boost domestic demand while fighting to keep inflation low was not a total surprise considering events of the last few months. Earlier this year, the International Monetary Fund (IMF) warned China that the country needed to increase domestic demand because a recession in Europe or the United States could cut Chinese economic growth in half. The World Bank also said China must push through reforms because if it wants to continue to prosper it can’t rely on the same strategies that led to its economic boom.

These warnings were supported by recent evidence that China’s growth rate was already slowing. News that the euro zone has fallen into recession also sent a message to China’s leaders that it was dangerous for their economy to continue to be so dependent on exports.

Although China’s economic growth and inflation rates get most of the headlines, China’s leaders are also struggling with several growing problems, such as an increasing disparity of incomes, wide spread pollution and an aging population. Each of these issues will play a growing part in Chinese politics and economic planning for years to come.

The markets haven’t reacted well to news of China’s plan to lower its economic growth target. The Dow Jones Industrial Average, the Standard & Poor’s 500 stock index and the Nasdaq Composite index are all down during Monday morning trading. However, investors should remember that Chinese officials have a long track record of economic planning that is second to none.

ACTION ITEMS:

Bullish:
Traders who believe that Chinese officials will continue to successfully steer their country’s economy might want to consider the following trades:

  • The iShares FTSE/Xinhua China 25 Index (NYSE: FXI) and the Global X China Consumer (NYSE: CHIQ) ETFs should move higher if China’s plan to increase domestic demand leads to Chinese companies increasing the amount of business they do in their own country. Being located in a country with rising incomes and the world’s biggest population, Chinese companies are well placed to profit from increasing demand in their home market.

Bearish:
Traders who believe that the lowered Chinese economic growth target is a sign that China’s days of rapid economic growth will soon be a thing of the past may consider an alternative position:

  • The ProShares UltraShort FTSE/Xinhua China 25 (NYSE: FXP) ETF surged higher today on news that China planned to reduce its growth targets. This ETF could move even higher on any negative economic news out the United States or Europe, or further evidence that China’s rapid economic growth is cooling.

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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