China’s problem is slow growth and the need to control inflation. The rest of the world is largely focused on trying to stimulate growth. These are obvious differences, yet the shudder of fear, or the surge of relief, that runs through markets in response to economic news often seems to ignore these fundamental differences.

 

A decline in European and US growth is catastrophic because growth rates are already low. The decline in China’s growth to 8.9% is not catastrophic. It is a moderation of growth that is already strong.

 

By the same token, a rise in the European and US growth figures of a few basis points is cause for celebration and a rapid rise in indices. The rise of a few basis points in China growth is very much less significant because it comes on the back of well-established and robust growth.

 

China’s growth for 4Q2011 was 8.9%, which exceeded analysts’ expectations of 8.5%. This difference of four basis points is marginal in the Chinese context but the same difference would have been dramatic for Europe and the US because their starting point is so low. Markets react emotionally, and sometimes counter intuitively, to these figures. The recent rally on the Shanghai Index on the back of slightly better- than-expected growth figures was reflected in world markets. The rally was overdone and should be seen in the broader context of volatility behaviour as the Shanghai Index hammers out a consolidation bottom. The selloff on the next day confirmed this over reaction. 

 

For traders, these volatility swings offer opportunities. For longer-term investors, it is more important to retain some perspective and that comes from understanding the vital differences in the economic circumstances that prevail in China.

 

2011 was a year of controlled economic slide, with frequent tightening of credit designed to slow down economic activity. The most important potential in recent growth figures are the signals that monetary tightening may be eased. There is an increasing probability that Beijing has stopped tapping on the brakes and will now let the economy coast along and slowly build up steam. It is good for exports to China, its good for domestic Chinese companies that rely on domestic demand and it is good for a battered housing and construction industry in the Middle Kingdom. This economic strength will be needed to counterbalance the decline in European activity. The challenge in 2012 is to create a domestic market that is capable of taking up the shortfall in export demand created by a slowdown in Europe.