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Last Word: Economy is Slowing Down, Stock Market Stopped Rallying,Don’t Panic Just Yet!
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Economy is Slowing Down,

Stock Market Stopped Rallying,

Don’t Panic Just Yet!

By Tracy Hall


WBT201510_280_Last_World_001_-_Dont_PanicAnyone who has had their eye on the Chinese economy or financial markets in recent months will know by now that the boom years are coming to an end. As Business Tianjin’s Andrew Smith has pointed out in a recent Economy Report, “Over the last few months we have had everything from big stock market crashes and dramatic rebounds to interest rate cuts within. It is difficult for the even the most seasoned financial observers to get their head around the volatility that we have witness within such a short period of time”.


Not surprisingly, there is a visible yet still fairly quiet sense of panic about the future prospects of the Chinese economy. A number of Western commentators have predicted that a slowdown in China will have disastrous consequences for the rest of the world. Elliot Wilson, a reporter for The Spectator, recently penned an article entitled Forget Greece: China’s Economic Slowdown is the Biggest Story of the Year. In this piece he highlighted the fact that “In recent weeks, everyone from fund managers to multinationals has begun to speak about what might happen if China’s economy falters. Audi, Jaguar Land Rover and BMW have all slashed local production forecasts or issued local profit warnings. Ford is expecting car sales in China to fall for the first time since 1990... Last year, Beijing was the largest sovereign importer of crude oil, copper and soy beans. It is a voracious buyer of French cheese, Scottish salmon and New Zealand lamb, and the world’s biggest consumer of cars and smartphones”. Wilson concluded his evaluation by saying that “There is virtually no industry that it does not influence, nor any multinational that does not include Chinese land, labour or capital somewhere in its supply chain”.


These concerns are certainly rational, given China’s growing importance as the world’s second largest economy. The prospect of a serious downturn is especially worrying for nations like Australia, as well as their major trading partners in Africa and Latin America, who have relied heavily on China’s insatiable demand for raw materials over the last two decades or so. However, the fact is that betting against the Chinese economy and Chinese policymakers’ ability to weather financial storms has not turned out to be a wise move thus far. Just ask pessimistic China watcher Gordon Chang, whose infamous 2001 book The Coming Collapse of China has been proven wrong for almost a decade and a half. Sure there are plenty of underlying issues – including structural debt and demographics – that could slow China’s booming economy down even further, but the fact remains that there are still some very strong economic fundamentals and a multitude of reasons to be optimistic about the Chinese economy in the long term.


WBT201510_280_Last_World_003First of all there is the unescapable truth that market corrections are not only unavoidable in any kind of economic system; they are also a necessity. As China’s leaders have themselves acknowledged in the last couple of years, the old model, which primarily centred on producing cheap exports goods and investing massive amounts of public capital into infrastructure projects, is in desperate need of a revamp. This economic transition, one of Xi Jinping and his administration’s key priorities since he took office, requires a dramatic rebalancing of the Chinese economy. During this period there will undoubtedly be some bumps in the road as businesses, investors and consumers adjust to the new economic conditions and the so called ‘new normal’ of GDP growth. When people get used to the idea that future economic growth will be slower but yet more sustainable then investor confidence is sure to return.


Of course a financial bubble, be it in stocks, bonds or real estate, always brings about euphoria in the short term. Like booze on a wild night out, it is plenty of fun until the hangover sets in. Then when the proverbial finally hits the fan and the bubble bursts there is obviously going to be a mass panic as the ‘get-rich-quick crew’ decide to escape with what little cash they have left. This phenomenon occurs everywhere in the world, and despite being as predictable as night and day, people still can’t avoid the temptation of quick cash whenever a country, a company or a stock market is on the up.


As always, in both the world of money and life in general, the real winners tend to be the people who are prepared to ride out the storms and think long term. Thinking outside the box is important, but so is thinking beyond the next few months or years. Even if the Shanghai Stock Exchange collapsed tomorrow in the same fashion that the Dow Jones and the FTSE did in 2008, it will eventually recover when the financial world’s risk appetite comes back. Likewise, if Chinese GDP growth comes in at 3.5% - half of the government’s official target of 7% for 2015 – the Middle Kingdom will still be massively outgrowing the stagnant debt and bureaucracy-ridden Eurozone. The same will probably be said of the United States, even if Mr. Trump (AKA ‘The Donald’) gets to implement his plan to “make America great again”.

 

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When things look bleak it is important to remember that the vast majority of economic and financial minds around the world are optimistic about China’s long term future. "This is a long term play," James Emmett, global head of trade and receivables at HSBC told CNBC. "Absolutely there is long term sustainable growth. But it is the evolution and the change that needs to take place, and some of the reforms that need to take place which will be key as to how quickly that happens". Moreover, he says that “We are inherently moving into new phase form the Chinese perspective. I think that is around the suitability of development. I think it is around the stability of development, I think the government is very focused on that". The moral of the story: If you want to prospect you have to ignore the doubters and stick to your long term game plan!


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