Whenever I assess the economy and the markets, I try to take particular note of any change in opinion from high-profile sources. I pay particular attention to this when an altered position is based on new data. So, when I read that Goldman Sachs had reduced its growth forecasts for China, it forced me to look at the second-largest economy in a new light.
In a note to clients, Goldman cited the latest round of weak data from China, including slowing exports, as the reason for its reduced GDP growth forecast. Goldman now thinks China’s economy for the full year will grow just 7.6%, down from its previous estimate of 7.9%. For 2013, the firm reduced its GDP growth estimates to 8% from 8.5%.
Here’s the money quote from the Goldman note that’s got even the staunchest China bulls rethinking their stance:
“We believe the deterioration in cyclical indicators and weaker-than-expected exports are headwinds that will keep the economy softer than expected in the next few quarters.”
For China bears, Goldman’s lowered forecast must be part vindication, and part “too little, too late.” Over the past year, noted China naysayer Gordon Chang — author of the influential book, The Coming Collapse of China — has been claiming that the nation’s economy is experiencing little or no economic growth.
In a recent interview on CNBC, Chang said “the wheels are coming off the Chinese economy.” His argument is that electricity production in the country has flatlined, and that the metric is a much more reliable indicator of economic activity than are the government’s official statistics. “When you look at the April-through-July period, electricity production increased by less than an average of 1.2 percent,” said Chang, who added, “and because the growth of electricity historically outpaces the growth of the economy, it means the economy can’t be growing more than zero.”
I have my doubts about whether the electricity production number is the ultimate arbiter of China’s economic activity; however, one thing that cannot be denied is that the Chinese economy is slowing, and it’s slowing faster than most expected, and certainly faster than China bulls like Goldman — and admittedly, myself — had anticipated.
Click to Enlarge The only potential saving grace for China is that recent downbeat data such as the decline in monthly industrial output, slowing retail sales, reduced fixed-asset investment and declining global trade suggest that China’s central bank is likely to step in once again and slash interest rates, and/or lower bank reserve ratio requirements. Of course, Chinese policymakers have done this not once, but twice in June, and so far we have seen virtually no boost in economic activity.
Now, in terms of the market’s response to all of this, we’ve seen the iShares FTSE China 25 Index (NYSE:FXI), a benchmark for large-cap Chinese stocks, plummet since February. This decline really ramped up in August, as FXI briefly rose up to resistance at the 200-day moving average before falling back down and plunging below the 50-day moving average.
Investors who are convinced that there’s more pain on the horizon for Chinese stocks can take advantage of that conviction with an allocation to the ProShares UltraShort FTSE China 25 (NYSE:FXP). This exchange-traded fund is designed to deliver twice the inverse performance of FXI. So, if FXI falls 2%, then FXP should rise 4%. The action of late in FXP is very bullish, with the fund recently breaching both the 50- and 200-day moving averages.
I think this is a fund even a former China bulls like me can embrace these days, so if you want to ride the slow boat that’s China, do so in FXP.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.