Disappointing Chinese GDP still suggests soft landing

By Emerging Money>,

Shutterstock photo

Chinese economic data disappointed Friday as GDP for the first quarter 'only' rose by 8.1% on an annualized basis.

[caption id="attachment_56158" align="alignright" width="220" caption="Beijing's Great Hall Of The People, the Chinese Parliament building"] Image courtesy Fastily: http://commons.wikimedia.org/wiki/User:Fastily [/caption]

Markets traded fairly flat before the official release with S&P500 futures up about a tenth of a percent and most Asian markets opening slightly higher. The market consensus for 1 st quarter GDP was for 8.4%, a steep decline from 8.9% growth in the fourth quarter of last year, although still well above the official government target of 7.5%.

S&P500 futures were trading down about a quarter of a percent after the report, suggesting a down market when trading begins in New York. Shares in Asian markets held up fairly well in the face of the data with most markets remaining slightly to the upside.

While 8.1% growth may be an enviable position to those in the U.S. or European Union, many investors are worried about China's reliance on fixed investment. Fixed investment in the country accounts for 47% of GDP and is seen as weak going forward. The government has made it a goal to increase domestic consumption to balance out the economy even as the target growth rate for the year is lowered.

Markets had been fairly optimistic on Thursday as China reported new bank lending of more than CNY1 trillion ($160.1 bn) in March, well over expectations. The central bank has relaxed bank reserve requirements twice since November of last year and it appears that this is now working its way through the economy.

March inflation data showed pricing pressures increased faster than expected to 3.6% on an annualized basis but still below pressures seen last year. While interest rates have not been reduced since 2008, many analysts see at least two more cuts to the reserve requirement this year.

Though first quarter GDP growth is above the government's target for the year of 7.5%, the weakest year-over-year growth since 2009 may move the central bank to further stimulus measures.

The GDP number clearly overshadowed other data  for the world's second largest economy but also reported was industrial production, fixed asset investment, and retail sales. Industrial production improved 11.9% while retail sales increased 15.2% in March, both above consensus expectations. Fixed-asset investment for the month increased by 20.9% over a year ago basis.

Overall, economic data released today shows a slight moderation in the economy but still respectable gains and certainly not the 'hard-landing' than many are forecasting.

Chinese stocks remain at attractive valuations compared to those in the United States or other emerging markets. Equities on the Shanghai index are trading at an average of just 9.9 times trailing earnings, just off record lows of 8.9 times on January 6 th of this year. While the disappointing read on GDP may pressure shares in the short-term, valuations and long-term growth keep Chinese stocks clearly on investors' screens.

Pressure from the data may fall on commodity producers like PetroChina ( PTR , quote ), the government oil and gas producer. While risks of government management of the company persist, shares pay an attractive 3.3% dividend yield and have outperformed most others with a drop of only 4.3% over the last year.

The Global X China Materials Fund ( CHIM , quote ) offers investors diversified exposure into material companies domiciled or with revenues in the mainland. The fund holds 61.5% of assets in metals & mining companies, with the rest (38.5%) in chemical companies. Shares are down a sharp 36.7% over the last year but trade for just 6 times trailing earnings.

Longer-term picks may come from retailers and other companies that service Chinese domestic consumption. Focus Media Holdings ( FMCN , quote ) operates a liquid crystal display network of digital advertising in China. As of mid-2011, the company had approximately 170,000 LCD displays in about 95,000 commercial buildings in 90 cities. Shares are down about 18.2% over the last twelve months, slightly more than the 16.9% drop in the iShares FTSE China 25 ( FXI , quote ) over the same period.

The Global X China Consumer ( CHIQ , quote ) invests at least 80% of its assets in consumer companies that are either domiciled in, or whose revenues are primarily fromChina. Shares are down about 15% over the last 12 months but may offer a good entry point for long-term investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
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