Daily Gains Letter

My New Strategy for China’s Slowing GDP Growth

By for Daily Gains Letter |

China’s Slowing GDP GrowthAs many of my long-time readers may already know, I have been bullish on China and Chinese stocks for some time. However, I’m now thinking that there could be some growth issues forming in the shadows—but that doesn’t mean there isn’t an opportunity to profit.

We have been seeing some obvious signs surfacing that suggest China’s economy is stalling, but we really don’t know the true underlying gross domestic product (GDP) growth rate in the Chinese economy.

According to the National Bureau of Statistics, China’s GDP grew at an annualized 7.3% in the third quarter, the slowest growth in five years and down from the 7.5% reached in the second quarter. The growth is also increasingly near the seven-percent threshold, which is a psychological level we have been monitoring.

Now, these are the numbers coming out of China, so there are some concerns that the readings may have been massaged to some degree to meet our expectations. I’m not saying with 100% confidence that the reading is false, but with China’s past record of false reports from Chinese companies, you have to wonder if the actual growth may be closer to the seven-percent level—or even below, as some market pundits believe.

In the end, it wouldn’t surprise me if the country’s GDP numbers were lower. China has been struggling with weak demand for the amount of commercial and residential real estate that has been—and continues to be—built around the country. There’s wide evidence of many offices and condominiums sitting empty with no market.

China has been building over the past decades to drive its industrial revolution that has made it the second-largest economy in the world, but now there are demand issues that could curtail this fantastical storyline.

President Xi Jinping, who assumed power in March 2013 to begin a 10-year term, has been trying to drive consumer spending in a direction more in-line with what we see here in the United States. The argument was that with more than one billion people and a middle class that outnumbers the population of America, China could create a massive army of spenders and lessen its dependence on foreign investment and exports. The problem? This has not materialized.

So while the growth rate continues to look decent at more than seven percent, the days of double-digit GDP growth appear to be over in China and the government will need to drive the consumer to spend.

This will be no easy feat, as Chinese consumers appear to be keeping their money in their pockets. With the country’s key trading partners, such as Europe and the U.S., holding back demand, we could see the country fall short of its 7.5% growth target for 2014 unless we see a spectacular fourth quarter of about eight percent—which is clearly not going to occur. This will represent the first GDP miss since 1998.

Given the downside risk for the Chinese economy, American investors can consider playing this weakness by buying put options on exchange-traded funds (ETFs) like iShares China Large-Cap (NYSEArca/FXI) or ProShares UltraShort FTSE China 50 (NYSEArca/FXP).

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