Slowdown. China. These have been the top two buzz words we've been hearing recently. Just go to the Bloomberg and Reuters websites and you'll see dozens of articles saying how Chinese growth concerns have been weighing down heavily on market sentiment.
How long will this concern last? In my opinion, not for very long. The fact is, when it comes investing, China is still where you want to put your money. Below are the top three reasons why.
Leading Indicators point up
First of all, leading economic indicators still point to a strong Chinese economy. China's official purchasing managers' index (PMI) rose to its highest level in one year and printed a reading of 53.3 for the month of April. Since the reading is above 50.0, it indicates that the country's manufacturing industry is going to expand further.
The services sector also kept up with the manufacturing industry. The seasonally-adjusted HSBC China PMI surged to 54.1 in April from 53.3 in March. This is its strongest reading since October 2011. Survey participants said that the jump was the result of better demand conditions, successful product launches, and marketing campaigns.
Leading indicators like the PMI is very important when analyzing the outlook of a country. They give us a preview what's probably going to happen in the next few months before the change actually occurs.
Influx of capital
Despite all the news that investors were worried about China's economic state, money actually continued to flow in the country. A report from the China Security Times revealed that foreign investors increased their stakes in Chinese equities by six whole percentage points in the first quarter of 2012.
This suggests that the worries are simply worries, and that the big boys still have a lot of faith in China.
Rebalancing is happening
One fundamental flaw in China's economy is that internal consumption contributes a very small share in its GDP. Rather than consumer activity, the Chinese economy is mostly fueled by international trade and government investment.
This is dangerous because if external demand falters, China will have nothing to fall back on.
The imbalance in China has grown so big that government officials have been forced to acknowledge the problem. As a result, Premier Wen Jiabao has made a pledge to do what he can to repair the Chinese economy.
The Premier vowed to stop the economy's dependence on exports and encourage a more balanced growth that would uplift the wages and expenditure of farmers and workers.
Premier Wen Jiabao's reforms seem to be working. Zhu Min, the IMF Deputy Managing Director, commented a few days ago that China is actually "landing quite well."
What does this mean for retail forex traders?
As a retail forex trader, you can't exactly just invest in China. It's just not practical or realistic. What you can do instead is look for currencies that can serve as a proxy for Chinese growth.
The Australian dollar is a great example. Australia is one of China's major trading partners and good economic standing in China normally translates to growth in Australia.
Of course, there are more currencies and commodities out there that are great substitutes. Suggest some in the comments!
- What Are the Chinese PMI Reports and Why Should I Care? 06:41 17 February 2012
- 3 Reasons Why China Won't Launch Another Stimulus Program 05:18 01 June 2012
- China's Manufacturing PMI Hits Its 14-Month High! 06:47 15 December 2012
- China Jitters 05:55 30 June 2010
- 3 Reasons Why China's GDP Numbers Aren't Good Enough 04:21 18 January 2012