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Highlights from the World Bank’s Quarterly China Update

|Includes:China Electric Motor, Inc. (CELM)

The World Bank publishes a quarterly comprehensive update on recent economic developments and policies in China through a team of World Bank economists in Beijing. The recently published June 2010 update discusses recent China’s recent growth and the economic outlook through 2020. Since the report is 22 pages long and covers a broad range of economic data, this post will focus primarily on the economic outlook as it relates to specific industries and companies within those industries.

After massive stimulus spending and accelerating GDP growth through 2009, the economic community is waiting to see whether China’s government continues to encourage rapid growth or takes measures to cool the economy. The World Bank forecasts a moderate scenario of 9.5% GDP growth for 2010, which falls roughly in line with most estimates. It projects 8.5% growth in 2011, and longer term its “growth accounting exercise suggests that potential GDP gradually declines to 7 percent in 2016-20.”

“The expected deceleration of potential growth also places a premium on policies that can increase sustained productivity growth, including via more reallocation of labor, enhanced human capital, and innovation,” says the report. As it becomes more challenging to continue delivering high rates of economic expansion over the next decade, the Chinese government is expected to enact policies favoring companies that can boost human capital (labor) productivity, such as firms in the professional education and training industries. For example, one promising company that would directly benefit from this anticipated trend is China Executive Education, Inc. (CECX), a provider of executive training programs and business skills seminars in China.

Analysts in the report noted that “recent adjustments in domestic fuel and water prices, the pilot with an ad valorem resource tax on oil and gas in Xinjiang, and plans to gradually end subsidized electricity prices for energy-intensive industries, are steps in the right direction” as China’s government begins to ease measures that give Chinese companies an unfair benefit in global competition. While policies intended to remove protectionist subsidies and underpricing could have an adverse short-term effect on some weaker firms, the price adjustments and recent yuan revaluation are positive long-term indicators since they signal Chinese firms’ increasing ability to compete in a free global market.

According to the report, the short-term outlook for firms in various consumer goods industries is also favorable: “Household consumption growth has remained solid, in line with a favorable labor market. The recovery of consumer confidence and continued consumer spending growth since early 2009 are in large part fueled by a strong labor market.” With a recent boost in car sales, home appliances, and other consumer durables, companies like China Electric Motor, Inc. (CELM), a manufacturer of micro motors for use in car components, household appliances, and digital equipment, should continue to see strong demand for their products.

Not only that, but the market for advertising is strong and typically very cyclical, following trends in the consumer goods sector. Companies such as China New Media Corp. (CMDI), which operates large outdoor advertising networks in some of China’s largest cities, stand to profit in the current environment.

The outlook provided by the World Bank seems to be one of moderating but still strong growth in China’s economy in the coming years, with a stable monetary policy forecast. This seems like the natural inclination as China matures into a fully developed nation.  As the update highlights, economic conditions have created abundant opportunities for Chinese companies to expand rapidly and will continue to do so for years to come.

Disclosure: The securities referenced herein are clients of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit

Disclosure: CECX, CELM, CMDI are clients of RedChip.
Stocks: CELM