China Expects Even Slower Growth, But This Time No One's Panicking

TAIPEI, Taiwan (TheStreet) - In the past, the news that China's economic growth was slowing would have been greeted with panic and major stock market selling around the world. 

This time it's been different, though.

Over the weekend, China officially forecast that economic growth would slow to as little as 6.5% this year. It would be part of a long-term decline in expansion of the world's No. 2 economy and the slowest rate since 1990.

Instead of plunging as they did back in August on similar news, stock markets reacted with little fanfare. Share prices in Japan and Singapore shed only a sliver. China's benchmark Shanghai Composite Index gained 0.8%. That's good for U.S.-traded financial institutions such as BlackRock (BLK) , Invesco (INV) and UBS (UBS) , which offer China funds open to American individual investors. 

Reasons for anxiety still abound, however. The lower-than-ever forecast by a country known for glossing over its problems says economic reforms aren't working after half a decade. Communist officials want to steer away from an economy driven by export manufacturing toward one reliant on consumer spending and investment in clean, high-tech, service-related industries. But reform is taking time because common Chinese still cling to their savings and private companies can't easily find growth capital.

Nations from Uganda to the United States depend on China's economy, so signs that it's losing a grip whip up worry in a lot of places.

"The Chinese economy is one of the focal points for investors as of late, and not surprisingly," said Kenneth Kavajecz, dean of Syracuse University's Martin J. Whitman School of Management. "The strength of the Chinese economy affects both the supply and demand of goods and services around the world. Investors will likely react negatively to the downwardly revised growth forecasts if they have not been anticipated by the market."

China forecast growth between 6.5% and 7% this year and average annual growth of at least 6.5% through 2020, per a government work report released Saturday.

Chinese economic growth backed largely by manufacturing and had buzzed along at more than 9% per year from 2002 through 2011, sending everyone who was anyone to invest in China. Then manufacturers began to hold off expansions in China as labor costs rose.

"The country is headed to an adjustment of historic proportions," said Gordon Chang, an author on Chinese affairs. "(President Xi Jinping) can slow the onset of the adjustment, but he no longer can change the economy's downward direction."

Overcapacity in state-owned factories also weighs on China's reform goals and any economic stimulus might just feed the same firms, said Alicia Garcia Herrero, chief Asia Pacific economist with French investment bank Natixis. "The later, the harder and more costly to clean up the mess," Garcia said.

So why would anyone trade neutral to positive on these conditions? Experts had sighted annual growth of 6% to 6.5% by 2020 last year, a view that may have been priced into the market.

China is also developing a rescue effort. Railway, highway and water projects will keep things going, with a bulk of the funding from the fiscal budget, Natixis forecasts. In December debt-worried economic planners formulated a plan to reduce overcapacity, cut costs for companies and sell off empty housing.

"No government in modern time has undertaken such a large scale re jigging of their economic growth drivers and we may have to wait for years to see if all goes according to plan," said Song Seng Wun, regional economist with CIMB Research in Singapore. The 2016 forecasts, he said "are within expectations."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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