Editor’s note: Dr. Duarte is one of the earliest proponents of a connection between the health of the U.S. housing sector and the global economy (See). The connection is simple. Demand for housing goods leads to production in China and other parts of the world. As the U.S. housing market slows, so does eventually the demand for goods from China and elsewhere. With housing starts hitting new lows on 11-17-06 and building permits falling, economists are starting to sound the alarm about the housing market, albeit months into the decline. History shows that when economists start noticing a trend, it usually has been in place for some time. Whether this is one of those times, won’t likely be known for some time. Nevertheless, the question needs to be explored. In this analysis, Dr. Duarte looks at the current data and the connection between two leading Chinese stocks. The analysis originally appeared at www.joe-duarte.com on 11-17-06.

China: Slowing Growth And Expanding Influence (11-17-06)
Headwinds Surface For China

The pace of economic growth in China is growing, as the Middle Kingdom expands its influence abroad. The combination might prove interesting for China and the global economy.

According to recent Chinese government figures, the pace of growth of China's economy fell to 14.7% as measured by its value-added industrial output for the month of October. The figures were short of the 16% or above expected by many economists.

Much of the slowing is likely to be due to tightening measures, such as higher levels of bank reserves, as well as other restrictions recently added by the government aimed at reigning in corruption.

And although the Chinese Central bank is predicting 10% GDP growth for 2006, according to the People's Daily: "The central bank predicts that China's economic growth may slow down in the future period due to the macro-control policies and global economic environment. It continues to say, however, the economy would develop fast and steadily as the driving force remains strong."

Furthermore, according to the paper: "The central bank warned that the slowdown of fixed assets investment and bank loans in the third quarter is unstable and China still suffers imbalance in international payments. Inflation pressure is still there and such issues as energy saving and pollution prevention have remained to be resolved. According to the report, the central bank would continue its prudent currency policy and put loan increase under reasonable control. Meanwhile, it would take comprehensive measures to speed up economic structural adjustment and carry out policies enlarging domestic demand. "

In fact, according to government figures, the central bank has only met part of its stated goals for the Chinese economy this year. On one hand, it has done a better job on inflation that its 3 percent target, by keeping CPI below 1.5%.

The problem has been keeping growth below 10%, two percentage points above the central bank's 8% stated goal.

Meanwhile, China is facing complaints about its inability or unwillingness to control piracy, and counterfeiting, according to recent recommendations made by an advisory board to the U.S. Congress.

According to the latest report by the U.S.-China Economic and Security Review Commission "U.S. customs officials have so far this year seized more than $150 million worth of pirated goods, most of it coming from China."

Carolyn Bartholomew, the Co-Chairman of the commission noted: '"Entire towns [in China] can depend on the revenue generated by counterfeiting," she said. "The Chinese government has failed to control such violations and typically prefers administrative fines, rather than the more effective avenue of criminal prosecutions."'

Chart Courtesy of StockCharts.com

Chinese stocks continue to mirror and expand upon general market trends. Most recently, Sinopec (NYSE:SNP), China's leading oil company had been on a huge run, which seems to have slowed as of 11-16. Sinopec continues to expand its global influence, and to compete with other global majors, such as Exxon Mobil, and France's Total. The stock has long term support at 60.

Chart Courtesy of StockCharts.com

Bidu.com, on the other hand remains in a rising trend, along with other technology related companies. Bidu's business is akin to Google's as it is the leading Chinese language search engine on the Internet. As with Google, Bidu's revenues are advertising dependent, and based on per-click revenues. The stock is an excellent proxy for the Chinese technology and advertising sector.

Conclusion

The Chinese government wants to slow down the growth of the economy, and is only being partially successful. Two leading stocks, Sinopec and Bidu, have been acting well, but may be showing signs of slowing. If these two stocks start to break, the next step will be to watch what happens to the Chinese economy. With international banks having more access to the Chinese market, starting in December, as well as the potential for a global economic slowing into 2007, the big question is whether China can continue to grow its economy at double digit pace, independently of the rest of the world.

© 2006 Joe Duarte, M.D.
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