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Is China Becoming Mainstream?

China has been called the sleeping giant for many years, and when it woke up it was the engine of economic growth especially in the emerging world. This is still the case but in a different extent as China is becoming more "mainstream" as a place to invest.

The economic numbers coming out of China are indicating that it is behaving more like a developed economy.(1)(4) There was a time when the expectation of 10% growth in GDP was normal in China. The current forecasts are calling for 7% growth which is considered a blistering pace in Europe or the U.S. However, these growth numbers may soon reach 3 to 5% which would be close to what a developed country would experience. There were issues with high inflation in the past and these have now subsided. In fact, there is now a lowering of interest rates to stimulate growth and to ward off deflation. (6) Deflation, stimulus and China were words that were never used in the same sentence until now. A booming real estate sector which was one of the hallmarks of China's growth surge is now slumping as well as its appetite for commodities. (4)

China is also "becoming international" in the way it does business with the rest of the world. It is attracting more foreign money into its investment markets, which means China will be under the same scrutiny as the developed world in deciding how to allocate capital. (3) China is now the second biggest equity market in the world, which means global investors will put some money in China just to have global representation. (2) China is trying to set up deposit insurance as well as overhaul its IPO rules to resemble international markets. (5)(7) The Chinese Yuan is also being used more frequently in world trade, and the Chinese bond market is expanding. (8)(9)

If China is in fact mainstream, it needs to be treated like a developed country in your investment portfolio. There will not be screaming growth numbers or huge opportunities like in the past but a more stable, slower moving pattern of growth which will correlate with the rest of the world more closely. This may mean adding more China to your asset mix for these reasons. It may also mean that you should have some exposure to China in the same way that many people would argue that you should you have some European or Japanese exposure just because it makes up a large part of the world.

Sources:

1) http://news.xinhuanet.com/english/china/2014-12/10/c_133844717.htm

2) https://www.bloomberg.com/news/2014-11-27/china-surpasses-japan-as-world-s-second-biggest-equity-market.html

3) http://www.businessweek.com/news/2014-12-09/china-seeking-foreigners-to-tame-stock-market-swings

4) http://www.bloomberg.com/news/2014-12-08/china-growth-seen-slowing-from-rail-to-retail-as-housing-peaks.html

5) http://www.bloomberg.com/news/2014-11-30/china-drafts-deposit-insurance-in-move-to-free-interest-rates.html

6) http://www.cnbc.com/id/102226063

7) http://www.reuters.com/article/2014/11/28/us-china-ipo-idUSKCN0JC0NG20141128

8) http://www.chinadaily.com.cn/business/2014-10/31/content_18833145.htm

9) http://www.bloomberg.com/news/2014-11-03/china-expands-access-to-its-4-3-trillion-interbank-bond-market.html

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.