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Is China's economy really collapsing?
Wed, 28 Oct Pre-Open

Recently, publisher of the Gloom Boom & Doom Report newsletter Marc Faber, stated that the credit bubble in China had reached a level of epic proportions. And that China's economy is not growing at all. The huge capital outflow from China in the past eight months was a testimonial of his argument. He also claimed that the Chinese were shifting their money out of the country at the record levels.

Further, he questioned the economic growth figures which the government has published. He doubted whether the 6.9% economic growth as portrayed is actually true. He substantiated the same with slow growth in export, import, industrial production and railway freight traffic. The railway freight traffic for instance dropped by 17% on a YoY basis.

China's slowdown in growth is not surprising. For a few years now, the country's growth rates have been declining steadily as per the data provided by International Monetary Fund (IMF). The growth has declined from 10.6% in 2010 to a projected rate of 6.8% in this year. Having said that, investor's should also keep in mind that over the years, China has moved from extreme poverty and technology backwardness to becoming a large, middle-income economy, powered by external trade and huge consumer spending. The economic growth had already hit sky-rocket levels. It would be unreasonable to expect China's economy to grow at levels of around 10% going forward.

An article in the business daily, states that China is contributing to the world economy than ever before. The Gross Domestic Product (GDP) of the nation is around US$ 10.3 trillion, up by almost 4.5 times from a decade ago. The article further states that simple arithmetic calculation shows that growth at 6 to 7% on a base of US$ 10.3 trillion produces much bigger numbers than 10% growth starting from a base that is nearly five times smaller.

As it may seem, these concerns do point towards China's issues being over-exaggerated. Having said that, China will definitely have to come up with productive economic reforms and policy measures to keep the momentum going, otherwise the concerns of a major economic slowdown may turn into reality.

All of these factors have certainly impacted the flow of foreign money towards emerging markets; China as well as in India. In India, for instance, FIIs have withdrawn around Rs 339 billion in the first half of this fiscal. However, these outflows have also been instigated by speculation of a rate hike by the US Federal Bank. Having said that, the fact remains that the highly volatile Chinese markets has led to shift of money to India. Exposure of most of the large offshore funds is the highest ever; in fact, most of these funds are believed to be overweight on India at the moment. While this may be a boon in present times, the opposite scenario could occur as well given the strong influence of FIIs on the Indian markets.

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