The Year of the Rabbit: Predicting China's Economy in the New Year

A few days ago, Chinese people marked the ceremonial start of a new year - the year of the rabbit.  The rabbit has long been seen as a sign of longevity and peace, but if 2010 is any indication, China´s economy is far from peaceful.  At the end of 2010, Chinese GDP growth was at 10.3% and inflation jumped to 4.6%.  Both of those results were well ahead of even the Chinese government´s own predictions.  So at the start of this new year, economists are asking if the government can calm rising economic indicators without intimidating long-term growth patterns.
Even with the Chinese economy in relative flux, investors often seek out the markets there as an alternative to the low returns and sluggish growth of western markets.  In fact, Advance Emerging Capital, a company which manages emerging market funds, estimates that $94 billion was invested in the Chinese market in 2010; that´s $11 billion more than in 2009.  In other words: China is thriving off investor relations.
China seems to have its booming economy under control: banks are lending to more and more customers and salaries for workers are rapidly rising.  Still, some economists are worried that this seeming financial bubble may burst.  Minimum wage in Beijing has just increased by 21% just seven months are an increase of similiar size.  Simultaneously, the price of basic groceries is rising twice as fast as general inflation rates.Not all financial gurus are convinced that the Chinese economy is in a bubble, just waiting to burst.  Anthony Bolton, head of the investment trust Fidelty China Special Situations, says this is still a good time for westerners to invest in China.  And Philip Ehrmann, head of the investment fund Jupiter China, predicts that inflation will fall in the second half of 2011.  He thinks food prices will stem off and that growth will level at eight percent.

Despite Mr. Bolton and Mr. Ehrmann´s reassurances, general concern about the over-growth of the Chinese economy meant that stock performances in the country in 2010 were disappointing.  Yes, there was huge investor interest, but inflation concerns hampered real investment returns for many.

Meanwhile, the list of those warning that the Chinese are experiencing a ready-to-burst bubble is growing.  Chinese investment funds like First State and Ashcourt Rowan are cautious and report that the prices of goods are starting to seem stretched.  Most economists are now warning that investors looking to put funds into the Chinese market do so by investing in a "general emerging market fund" which puts money into less specialized sectors.

Photo credit: Steve Evans