Conflicting Issues In China: Inflation And Economic Contraction

Includes: FXI, GXC
by: David Fry

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Normally we would consider this a "stagflation" environment. But the economic environment in China is probably not as stable as more mature countries where economic growth is measured in low to mid single digits and higher rates of inflation in upper single digits.

Recently China put economic growth contracting at 8.1% versus previous readings approaching 9-10%. For them, this is a contraction. At the same time inflation readings have been increasing due in part to widespread property speculation. The current inflation rate in China was recently reported at 3.6% which is slightly below the government's 4% target. Below is an annual chart of contemporary Chinese inflation data.

Just as occurs with government inflation data in the U.S. and other developed countries the veracity of the data is subject to question. This may be especially so when dealing with an autocratic and secretive government structure. In such an environment government leaders may assert and publish any number without any check. China's unique population with its fast growing and prosperous urban areas is set against an even larger poor and struggling rural area.

China's monetary "easing" tool of choice in this instance would be lowering bank reserve requirements which theoretically would stimulate more bank lending. It is suggested this will happen shortly; however, it contradicts the policy of restraining property speculation. This puts the country in a box.

The most popular China ETF by assets is the FTSE Xinhua China 25 ETF (NYSEARCA:FXI) followed by SPDR's China ETF (NYSEARCA:GXC). Objectively both have struggled to provide decent returns over the past few years while remaining in well-defined trading ranges.

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

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