Investment Contrarians

How Confusion About the Chinese Economy Is Hurting Your Stocks

By for Investment Contrarians |

Chinese Economy Is Hurting Your StocksWith investor confidence still relatively weak, many are looking for any signs of a rebound in the global economy. One area many are looking to is the Chinese economy. Not only has the Chinese economy become a greater force within the world economically, but many U.S.-based companies are generating a significant amount of earnings from that nation. Investor confidence is partially being predicated on the hope that the Chinese economy can offer some glimmer of optimism, as opposed to the still anemic gross domestic product (GDP) growth levels in America.

Recent data from China offers a bit of a mixed picture. Exports in October rose at the fastest pace in five months, coming in 11.6% higher than the previous year. This compares to 9.9% year-over-year growth for September. That is certainly a good sign for the Chinese economy, and some investor confidence might be rallied off such figures. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.) However, the sky is not all clear yet.

The head of the National Development and Reform Commission, Zhang Ping, stated that he believes the Chinese economy must be prepared for increased turmoil from various nations around the world. In addition, domestic issues still are quite serious. (Source: “China Exports Exceed Estimates in Sign of Global Pickup,” Bloomberg, November 10, 2012.)

This is a difficult way to build up investor confidence. On the one hand, there are some signs the Chinese economy and the global economy might be moving upward off the floor. However, there are still numerous indicators pointing to the fact that things could quickly unravel and become far worse. Neither the Chinese economy nor the U.S. economy can take a massive hit at this time; they’re still too fragile.

While I’m sure no one wants to keep hearing about Europe, the truth is that the problems there are far from resolved. With Europe being a huge consumer for exports from the Chinese economy, investor confidence must be tempered with the reality that if Europe crumbles, the ramifications would be quite severe for many firms and nations around the world.

It certainly is good that we’re seeing some positive news in the data regarding the Chinese economy. However, I would certainly caution that optimism be topped with a healthy dose of skepticism. Investor confidence needs more than a month or two of data from the Chinese economy to have a long-lasting impact on stocks in America.

If Europe were to implode, and if this further hurts the Chinese economy, you can be sure that many U.S. corporations, as well as America itself, will feel the pain. This is why investor confidence is so fragile; because the global economy is so intertwined that situations that occur thousands of miles away will hit our shores eventually.

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