Driven by rising food and key commodities prices, inflation pressure ran up rapidly in 1H11. As monetary policy tightening and other anti-inflation measures were implemented, CPI peaked in July and eased afterward. High inflation pressure was the market's focus last year.
Despite that the fundamental drivers of the Chinese economy remain resilient. The real growth of retail sales has picked up recently as inflation pressure abates, and the sequential growth of industrial production has largely stabilized.
A key theme of the 2012 outlook for the Chinese economy is that the macro economy will demonstrate a scenario featuring slower growth and lower CPI inflation with looming external risks. So China will show a second year of below-trend growth because of headwinds from the global slowdown, domestic housing market weakness and limited room for policy stimulus. A growth by just 7.5% could be the case, below consensus expectations of 8% to 8.5% real growth.
Innovation and development of strategic emerging industries could be the catalyst for 2012 investment in China. In the 12th Five-Year Plan, China has a target to have emerging industries contribute around 8% of its GDP by 2015 (versus 4% in 2010). This entails massive investment in these top-notch industries.
The year 2012 is the second year of the 12th Five-Year Plan, because many projects that are planned and approved are expected to be launched and constructed.
China’s domestic demand and investment will remain a growth driver this year and I think a hard landing is unlikely to happen. Quite the contrary, the central government’s policy remains focused on inflation and loosening won’t be needed as long as growth holds up.
Structural long-term trends favor the consumption and services sector in China. Even with a slowdown in GDP growth, these areas will outperform the general economy. If a new recession occurs China would embrace another stimulus program, which would be beneficial for both sectors mentioned.
The future path of economic transformation in China will be consumption oriented
Investors who read my articles frequently know that I am already positive about consumer related US-listed China stocks such as American Lorain (ALN) and China Marine Food (CMFO). Both performed lousy last year, but are ready for a comeback.
For investors that don't like the risks of investing in China stocks I would recommend American quality companies such as Apple (AAPL), Coca Cola (KO), Starbucks (SBUX) or Yum! Brands (YUM). Those four companies are reaping the fruits already and will benefit even more in the years to come. See Buying 5 Stocks That Are Consumer Trending And Will Profit From China for more on these stocks.