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Straits Times 3,211.49 +16.53 +0.52%
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China’s Growth: “New Normal” Versus “Old Normal”
Aspire, Investments | 01 July 2015
By: Vance Wong
Articles (74) Profile

In the recent years of Chinese economics, every time financial expectations are not met, the Chinese government would step in and intervene by launching large-scale investment projects to maintain growth as much as possible.

It seems like the Chinese government has been overzealous in trying not to shy too far away from the “old normal”, which is a double-digit growth of about ten percent. The “new normal”, as some might put it, is a mere seven percent.

However, with the Chinese authorities intervening, is the “new normal” of seven percent growth organic and justifiable, or artificial?

Economic Transition Or Slowdown

Some optimists might argue that China is actually going through an economic transition, where interventions are merely speeding up growth with minimal repercussions. On the other hand, some are pointing out that slowing growth is inevitable, especially when China had been growing impressively for quite some time now.

Undeniably though, the injections of investments had created imbalances in the Chinese economy as a whole. That is to say, because these projects are normally targeted at specific sectors, the other sectors that do not receive investments would clearly lag behind.

Furthermore, e-Commerce platforms are increasingly pervasive in the daily lives of the Chinese. To some, this is a sign of economic transition. But it is really just providing convenience and efficiency for consumers, increasing the outreach and potential of businesses.

China Not As Attractive Anymore

As seen from the graph above, the Chinese government initiatives have proved to work in the short-term but has ceased being drivers of sustainable growth. Returns have been decreasing drastically and Price-Earnings (P/E) ratios are ridiculous for stable stocks.

Given that the Chinese economy and industrial structure are imbalanced right now, it is hard to tell if the current state of the Chinese market is safe for long-term investments. The current market volatility makes it a lot riskier to make investments, while quick trades make a lot more sense.

It is hard to say if China’s growth will continue slowing down, maintain or improve in the long term. With the recent materialisation of the Shanghai-Hong Kong Stock Connect (SHKSC) and even the upcoming Shenzhen-Hong Kong Stock Connect, it is still too early to judge.

Nevertheless, investors should shy away from taking huge and long-term positions in the Chinese market. It is overvalued at the moment, but there are still openings for opportunities if investors look in the right places. Short-term trades should make up the bulk of your investment portfolio in China stocks.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.


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