Sunday , 19 May 2024

Continuing Economic Problems In U.S. and Eurozone Suggest Investing In Economies That Work, Like China – Here's My Rationale

So says Jeffrey Friedland ( in edited excerpts from his original article* posted on Seeking Alpha under the title The Global Economic Outlook: A Direct Path To Chinese Equities.

Lorimer Wilson, editor of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Friedland goes on to say, in part:

I believe that it is now time for many investors to re-examine their trading and investment strategies. While all of us had hoped that a permanent and sustainable solution to the eurozone crisis would have been implemented by now, it is increasingly clear that there is no end to the crisis in sight. Longer-term, I believe a “new European order” will emerge, but it could be years. Until then, eurozone economic growth will suffer.

While I’m hopeful that the U.S. will eventually deal with the magnitude of its fiscal and economic growth issues, I also don’t see solutions occurring in the near future.

There are four key factors that investors need to consider when looking at China:

  1. Economic prospects for the eurozone and United States
  2. The U.S. Federal Reserve’s continuing quantitative easing programs
  3. Current and possible Chinese economic stimulus programs
  4. Economic prospects for China

Economic Prospects for the Eurozone and United States

While there are exceptions, it is difficult for companies in individual countries to grow at a rate greater than the growth rate of their country’s economy. With this in mind, let’s take a quick look at the eurozone and United States.

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While many of us have been hopeful that a solution to the eurozone crisis was in sight, it’s now apparent that there is no short-term solution.

This past summer I attended a speech given by former U.S. Federal Reserve Chairman Alan Greenspan…[in which he made] three key points:

  1. Write off Europe for the foreseeable future.
  2. Citizens/voters will not endure short-term pain for long-term objectives. (This applies primarily to Southern European countries including Spain, Italy, Portugal, and Greece, as well as more than likely, France.)
  3. Southern Europeans will never become “Germans.”

These three items give one a quick and perhaps different outlook regarding the future for the eurozone. The International Monetary Fund (IMF) is projecting eurozone GDP growth at a negative .4% for this year, and a miniscule .2% for next year, with a great variance of growth among individual countries.

Economic prospects are not as bleak for the U.S. as those for Europe, but not overly encouraging. My opinion is that due to structural issues in the U.S. economy, unemployment at a rate of around 8% or more has become the new normal, and high unemployment will be with the U.S. for a long time. Regardless of the outcome of the U.S. presidential election, the outlook for the U.S. for the next few years is not an optimistic one. The economic prospects for the U.S. are compounded by January’s “fiscal cliff,” which I believe will be resolved by compromise between the Republicans and Democrats, just in the “nick of time,” but result in members of both parties not being happy with the outcome.

This month the IMF projected U.S. GDP growth of 2.1% for this year and 2.1% for next year. I believe that with the magnitude of the U.S. economy’s structural issues, the prospects of the U.S. returning to economic growth above 3% in the next few years is incredibly unlikely.

When you look at the economic growth of the both the U.S. and Europe, all investors must also consider the ugly specter of inflation. The IMF has projected consumer inflation in “advanced economies,” which includes the U.S. and Europe, of 2.7% for this year and 1.6% for next year. I believe that the likelihood of a significantly greater rate of inflation is substantial. Keys to future inflation will also be whether the European Central Bank (ECB) and the Fed are able to significantly shrink their bloated balance sheets as economic growth returns somewhere. The “somewhere” is, I believe, likely to be China and not the U.S. nor the eurozone.

When one takes into consideration inflation, the GDP growth prospects for both the eurozone and the U.S., are even bleaker than they at first appear to be. Taking into account inflation and based on the IMF economic growth data, there will be negative real growth for all of this year, as well as for 2012 for both the eurozone and United States and I believe that inflation is likely to be substantially higher than the IMF is projecting for 2013 and beyond.

The U.S. Federal Reserve’s Quantitative Easing Program

The U.S. Federal Reserve’s latest round of quantitative easing or QE3 is creating collateral damage in emerging markets. Whether this was a planned objective is unclear but QE3 is providing opportunities for investors who have a global perspective.

QE3 consists of the Fed purchasing up to US$40 billion of mortgage debt each month. The Fed has indicated that this will remain in place until the outlook for jobs in the U.S. improves “substantially.”

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With the U.S. being in the midst of the campaigning for the presidential election, China has emerged as a convenient scapegoat. China bashing is part of the daily campaigning rhetoric by both candidates, President Obama and former Governor Romney. With the strong business and financial integration of the U.S. and China, this rhetoric is definitely not in the best long-term interests of the U.S.

I think it’s naive to believe that the U.S. Federal Reserve is an independent body, one that is immune to political pressure and public opinion. While differences of opinions have been voiced, many see as a lack of positive impact on U.S. economic growth and on employment from the Fed’s quantitative easing programs to date. Opinions are also being voiced that the Fed’s quantitative easing programs are reactions to public and political pressure, and that the latest QE3 has more to do with an American-Chinese trade than as a stimulus program for the U.S. economy with the key direct beneficiary being the U.S. economy….

Confirming this position was China’s Vice Foreign Minister Cui Tiankai who, when speaking in Brussels on Tuesday…indicated that the Fed’s latest round of quantitative easing is adding to financial market instability and inflationary pressure in emerging markets. Last Sunday in Tokyo, in response to concerns raised by countries including Russia, Brazil and China, Federal Reserve Chairman Ben Bernanke said that it was unclear to the Fed that its highly stimulative monetary policies were hurting emerging economies.

Bernanke bluntly called for “certain” emerging economies to allow their currencies to rise, with a consequence being an increase in the cost of their exports to importing countries, including specifically to the U.S. Although he didn’t mention China, his comments were definitely directed to China.

Economic Prospects for China

Earlier this month, the IMF projected China’s economic growth for this year at 7.8% and for next year at 8.2%. While 7.8% growth is the weakest in more than three years, industrial production, retail sales and fixed-asset investment all accelerated in September. This and other indicators, including recent increases in the prices of certain commodities including iron ore, are signaling that China’s growth may be rebounding after a seven-quarter slowdown. It also reflects China’s strategy of seeking to rely less on exports for growth, and increasingly more on the country’s domestic economy.

When you compare China’s GDP growth of 7.8% to that of the eurozone or U.S., you have to admit that China’s growth is incredible in today’s global economic and financial environment.

Current and Possible Chinese Stimulus Programs

China’s recent infrastructure stimulus, totaling US$158 billion, with its focus on the domestic economy, should stimulate consumer spending and the country’s important manufacturing sector. This stimulus program is seen as benefiting consumer buying and internal Chinese economic growth as opposed to export-driven industries. Additionally, China’s money supply has recently grown as Beijing has pumped more funds into its economy.

While questions have been raised as to why the Chinese government hasn’t taken more stimulus steps, I believe that the main reason is that existing leadership doesn’t want to leave the country’s new leadership with a legacy stimulus program that could prove to be problematic for the new government.

After the November 8th change in China’s senior leadership, I expect additional measures will be taken to stimulate the country’s economy, but these may not “kick in” until China’s new leadership has time to “get its feet on the ground” and create its own programs, which I see as occurring late fourth quarter of this year, at the earliest, and more likely the first quarter of next year.


With the continuing economic problems of the U.S. and eurozone, it’s appropriate to look at investments in “countries that are working.” This immediately leads one to China….

With the Chinese economy likely having bottomed out, and with the valuations of Chinese companies that trade in the U.S. being very low, I believe that it’s appropriate for investors to take a fresh look at Chinese equities that trade in the U.S. This, I believe should be done not from a short-term perspective, but from a longer-term perspective. (Some of the companies that I believe meet a few general criteria (positive trends in revenue and income; low PEs; companies that are focused on internal Chinese demand rather than export; and companies with good growth prospects for the future) include [see here].

*Source of original article:

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Article:

1. The China Syndrome – Fully Understanding China’s Economic Prospects: Michael Pettis


In order to argue that we will not see a sharp slowdown in Chinese growth, it is not enough to claim that a) some expert or institution has predicted that Chinese growth will not slowdown, b)that China has enough savings in its coffers to bail itself out of a crisis or c) that Beijing leaders cannot tolerate growth below 8%, so of course growth will not drop below 8%. As greater evidence for the bear camp surfaces, China bulls need stronger justifications for their positions or risk losing credibility. [In fact, they need precise answers to 3 questions put forth in this lengthy but extremely insightful (dare I  say, absolute best, article on the China sydrome to have ever been written!) article. Words: 4130