Is China Headed For A Recession?

| About: iShares China (FXI)

The anguish over China is a pretty telling sign that we have become almost spoiled when it comes to Chinese economic growth. Lowering growth projections to 8% or even a little lower has had plenty of investors and analysts worried.

Every month now, it seems as if China's economy is slowing a little more than was expected as imports drop, supplies stockpile, real estate bursts, and governments find themselves stuck with a ton of debt because of past stimulus measures.

This has led some to claim that China should go ahead and do another round of stimulus. This completely misses the point of corrections -- it's an important part of the economic cycle and should be allowed to play out, otherwise malinvestment bubbles and resources will be wasted. This is a lesson the U.S. government and European governments should have learned about a century ago.

A recent article on Market Watch covered it well:

The $632 billion stimulus package launched in 2008 has left local governments saddled with debt and the economy grappling with inflation. Policy tools have little room left to work. It's no good calling for another round of stimulus; we can't drink poison to quench our thirst.

Poison, indeed.

Either way, the notion that the Chinese government will allow the economy to free fall to what might be a much needed recession is unlikely, as it has shown in the last several years to be similar to its more Western counterparts in its desire to see economic growth every year, whether it's risky or not.

Why This Matters to Investors

I've talked repeatedly about China now, including in my article "Is China Losing Control Of Its Economy?" It's one of the most important trends to watch because an unexpected Chinese recession could have outrageously strong implications for the rest of the world, including my recent research in copper prices and investments.

In almost all recessions, the politicians and mainstream financiers believed everything would be fine -- until things weren't. That's why the cautious investor should always keep his or her powder dry and not make big bets in uncertain times.

Over the next six to 12 months, we'll likely finally see which direction the Chinese economy is going to take, and whether a major recession or just a slight dip in growth is going to be the end result. At that time, I'll be likely diving head first into miners and other companies that provide supplies and products to China from outside the country, like Southern Copper (NYSE:SCCO).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.