China’s Weak Data Could Still Capture Gold

by Jim Woods | August 10, 2012 7:30 am

For the past two weeks, citizens around the world have been watching the Olympic Games. One of the interesting subplots in this Olympiad is the fight for medal dominance between the U.S. and China. As of this writing, the U.S. is slightly ahead in the total medal count[1] (81 to 77). However, China actually has won more gold medals (36 to 34).

Yet when it comes to economic gold, the Chinese have fallen off the podium completely.

Data released Thursday and Friday morning shows that even economic trends that were expected to improve are sagging, and that’s given the China “hard landing” camp more fodder for its argument that things are even worse in the country than originally suspected.

Here’s a rundown of the latest figures from the world’s second-largest economy.

These data points all suggest that despite China’s moves to stimulate its economy by issuing not one, but two interest rate cuts in June, the economy has failed to respond as Beijing policymakers had hoped. The decline in monthly industrial output, retail sales, fixed-asset investment and global trade also suggest that the central bankers are likely to step up to the plate yet again and take a big swing at even more interest rate cuts and/or lower bank reserve ratio requirements, both of which are designed to stimulate lending and business activity.

Two big data points also released Thursday could give Beijing a lot more cover when it comes to how aggressive it can be in putting more liquidity into the financial system.

Both China’s consumer-price index and its producer-price index showed that inflation is still not an issue, despite the recent rounds of easing. For July, consumer prices climbed 1.8% over the year-ago period. That’s the lowest measure since January 2010. The number also is down from the 2.2% increase in June. The producer-price index fell 2.9% in July, steeper than the 2.1% decline in June.

Now, perversely, China’s slowing data and tame inflation actually could be good news for investors willing to take a dip in Asia’s biggest pool. John Woods (no relation), chief investment strategist for Asia Pacific at Citi Private Banking, told CNBC[2] his thoughts on the latest China data, saying, “It’s one of these situations where it’s so bad, it’s good.”

What Woods means is the slowdown will almost certainly be met with more stimulus/easing from China’s central bank. That could be good for stocks pegged to China’s fortune, such as those in the iShares FTSE China 25 Index (NYSE:FXI[3]), as well as other China bellwethers such as (NASDAQ:BIDU[4]), China Mobile (NYSE:CHL[5]), CNOOC (NYSE:CEO[6]), (NASDAQ:SOHU[7]) and Youku (NYSE:YOKU[8]), to name just a few.

For intrepid investors who want to bet on future Chinese gold, the latest data provide a counterintuitive reason to get into the game now before the central bank takes another stab at stimulus. As we’ve all learned over the past several years, what Wall Street loves most is to have central banks lending freely. China, and stocks tied to her fortunes, is no exception.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

  1. is slightly ahead in the total medal count:
  2. told CNBC:
  3. FXI:
  4. BIDU:
  5. CHL:
  6. CEO:
  7. SOHU:
  8. YOKU:

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