Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. While I do make mistakes, I try hard to do my analysis thoroughly, and to make sure my data are correct (old habits die hard!) Also, don't ask me why I called it "Volewica". It's too late, now.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Saturday, July 14, 2012

China pulls out all the stops

Chinese GDP in the year to June grew just 7.6%, by Chinese standards a recession. Share markets instead of falling, jumped, because the markets interpreted these data and also soggy industrial production (IP) data released at the same time as a clear signal that the Chinese authorities will pull out all the stops* to get growth going again.  And indeed this report suggests that China had already started to restimulate their economy. For example, infrastructure expenditure in the transport sector was up 44% year-on-year in June a huge increase from previous months.  My forecast is that we have seen the low in the Chinese economy, and growth will now start accelerating.

Why does this matter?  In 2007, China was 11% of the world economy.   Because of the sustained differential between Chinese and world growth, it's probably around 14% of the world economy now.  If Chinese GDP growth expands back to 10%, that alone will be enough to increase world growth by 1.4 percentage points.  If you add in Brazil (about to resume growing again) and other developing countries where growth remains elevated, the world could grow by 2% without America or Europe growing.  But more on Brazil, Europe and the debt default fandango later.

*this metaphor comes from organ playing.  You "pull out all the stops" when you want to get maximum volume from the pipes.  A mate, Horatio, gave me this little anecdote:

I have heard (from my paternal grandmother, so the story might be apocryphal) that when the steam organ was played at the Crystal Palace near London for the first time in the mid 1800s, the sound was so loud that people nearby believed it was the sound of the trumpets heralding the Last Days and fell to their knees in great agitation.

The moral of the story is in share markets, alas, is less uplfifting. When you hear that all the stops have been pulled, don't fall to your knees and repent. Buy, instead.

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