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As China's Economic Slowdown Continues, Should Investors Be Concerned?

With over five thousand years of history and a population of nearly 1.4 billion, everything about China is massive. This country was shrouded in isolation for most of the 20th century, until just under 40 years ago, when it opened up to trade and thus, the rest of the world. Since then, China has chugged along on a never before seen fast track to economic development.

Now the world’s second-largest economy, China is intricately intertwined with the global economy. Its rapid growth has benefited import-heavy and export-heavy nations alike, but recently the “Middle Kingdom” began to slow down.

By the Numbers

This week, China released its economic data for the month of July, and it seems the trend in decreasing growth is only continuing. Both industrial output and retail sales fell below expectations, and trade volume has diminished as well.

The International Monetary Fund (IMF) expects China’s GDP to grow by 6.6% this year, while China itself forecasted growth of between 6.5-7%. The graph below, courtesy of BBC, reflects how big a fall this represents from growth rates of recent years. The IMF expects the slowdown to continue, projecting a growth rate of 5.8% by 2021.

Retail sales increased by 10.2% year-over-year in July, but are below the 10.6% increase of the month before. Private investments have only grown by 2.1% year-to-date, which is quite notable considering it accounts for 60% of total fixed-asset investment, according to the Wall Street Journal.

The National Bureau of Statistics in China attributed the slowdown to major flooding, waterlog, and high temperatures in certain areas. However, considering the downward trend has continued for some time now, it’s hard to think that the weather has had much to do with it.

China also saw a decrease in trade during the month of July. Specifically, exports dropped 4.4% to $184.7 billion, while imports fell 12.5% to $132.4 billion. Although the country is working on encouraging a boost in consumption, these values paint a narrative in which that end-game is still far off.

In mid-July, the Bureau announced that the Chinese economy beat growth expectations in the second quarter due to increased infrastructure spending by the government. The growth rate of 6.7% beat expectations of 6.6%, and it seemed that the fog was starting to clear.

What Do the Numbers Mean?

The data from July counteracts some of the bullishness that the previous report drew forth, but that isn’t to say that the country is in trouble. A diminishing growth rate can also simply be attributed to a stabilizing economy, as growth rates in the teens simply aren’t sustainable.

Despite these recent worries, China has become home to a burgeoning middle class that is a force to be reckoned with on the global stage. In just three decades since Deng Xiaoping’s economic reforms, China now finds itself home to the largest middle class on Earth, with over 225 million households now in this category.

Although the numbers may be lower-than expected now, signs are overall still quite promising for the country that was very recently operating in complete isolation. According to research by Global X, the issuers of the China Consumer ETF (CHIQ), Chinese GDP growth is expected to be propelled largely by consumption in the years to come.

Bottom Line

A growing middle class with more disposable income should be able to do what Global X expects. Although the GDP growth rate may not be as flashy as it was, investors will see that China still has a bright future.

Interested in other top stories from this week? Listen to Zacks Friday Finish Line to catch up on recent financial and investment news.

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