Reducing the external surplus from more than 10 percent of GDP before 2008 to about 3 percent now -- while limiting the fall in growth from 10 percent to about 7.5 percent -- is quite an achievement. In my view, the “unsustainable” component of China's economic prospects was the current-account surplus, not the growth rate, and the needed adjustment in the surplus has been achieved.
What about investors losing money in China? How can that be, if the economy is doing pretty well? It depends on how you measure investors' returns. True, passive investors in the Shanghai index have suffered since 2007, despite a big rally from late 2008 through late 2009. But how many investors invest that way? More important, the Shanghai index is dominated by past winners in the China growth story. If China is rebalancing-- moving away from exports, improving the quality and sustainability of its growth, depending less on government- backed companies -- then the winning investments will be quite different than before.
It's revealing that the Shenzhen index is performing much better than the Shanghai index, thanks to its greater exposure to newer, smaller, private companies. There's a more general point here: When a country is embarking on a significant compositional change to its economy, stock-pickers rather than index-trackers have the upper hand. The same logic applies to foreign companies trying to benefit not just from China's ongoing growth but also from its new drivers of growth. No doubt this is a little simplistic, but Apple Inc. or Procter & Gamble Co., say, are likely to benefit more in this economic environment than Caterpillar Inc.
If you ask me, China's economy hasn't finished impressing the world with its strength. The changing foundations of that strength may make the prospects harder to read -- but the fact that the underpinnings of Chinese growth are indeed changing is all to the good.
Eoin Treacy's view While the Shanghai Composite is one of the most widely followed Chinese indices, futures are based on the CSI 300 and the majority of foreign investors participate via Hong Kong listed H-Shares, the Shenzhen B Shares Index is more reflective of the country's increasingly vibrant private sector. (Also see Comment of the Day on September 19th).
The Shenzhen B-Shares Index has no banks and is generally more focused on consumer themes. The Index has been ranging in the region of the 2011 and 2007 peaks since February and while it continues to find support in the region of the 200-day MA, a sustained move above 900 will be required to reaffirm medium-term demand dominance.