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China's economic challenges

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economy_5 December 21, 2011 (Chinavestor) China is not immune to western economic woes despite a healthy 9% GDP growth in 2011. The Shanghai Composite Index (SHA:000001) is off 21.9% for the year while the Dow Jones Industrial Average (INDEXDJX:.DJI) managed to eke out some gains! Chinese stocks underperformed western indices by a wide margin, a surprise to many. Why is that?



There a number of factors contributing to the decline of equity prices in China. For one, a lack of confidence that the economy will be as robust as before, is keeping investors from entering the fray. Lack of strong money flows is primarily responsible for the decline.

The reason money flows are missing are numerous. Housing prices have fallen in half of China's 70 largest cities in November as the government is reigning over the property market. Higher inflation is still a problem, according to Premier Wen Jiabao. This suggest the government will keep monetary policy tight going forward, easing growth. Also, the European Union is China's largest trading partner and exports to that market is hampered by economic woes in the old continent.No wonder, GDP growth has been falling...


And it's not just macro economic factors that keep investors uneasy. Ping An Insurance (SHA:601318), the second largest Chinese insurer, fell the hardest among large components of the Shanghai Composite Index (SHA:000001) today after announcing plans to raise as much as RMB26 billion from the bond market. Chinese insurers are seen by many as indicators of the broad economy. When Ping An Insurance (SHA:601318) is in a need to raise an awful lot of money, outlook for stock returns turns darkens.

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