Chinese leaders already anticipate that the country’s economic expansion in 2015 will be its slowest in 25 years. The gross domestic product (GDP) projection? 7%. Analysts have ridiculed everything about the world’s 2nd largest economy from the nation’s extraordinary debt build-up to the modern-day ghost towns of empty apartment complexes.
Ironically, these same critics barely flinch when the U.S. expansion logs an inexplicably impoverished 0.2% year-over-year. They blame weather patterns for U.S. stagnation, even though California, Texas and Florida experienced typical temperatures throughout respective winter periods. And what happened to lower oil prices serving as a mega-boost to consumer spending? Apparently not. (At least the Federal Reserve believes the economic weakness is temporary.)
Writers tell you that China is falling apart. They tell you that the U.S. is thriving. And then they back up the falsehoods with the disparity in stock market returns. For four long years, investing in SPDR S&P China (GXC) had been an exercise in futility, whereas investing in broad U.S. equities via SDPR S&P 500 (SPY) had been a sensational path for accumulating gains.
It is true that China’s economic growth decelerated from 8%-9% to 7%-7.5% over the four calendar years, but this had little to do with the adverse impact on ETFs like GXC. In reality, China chose not to rely on monetary policy gamesmanship that might depress rates or bank reserves and subsequently spur speculative investment activity. Uneven, unpredictable, sparse stimulus never satisfied market participants.
In contrast, the U.S. Federal Reserve unleashed its largest emergency stimulus package in the 2nd half of 2011. Former Fed Chairman Greenspan has publicly acknowledged that the creation of electronic money to buy trillions in U.S. debt obligations – affectionately known as quantitative easing (QE3) – did little to spur economic growth; rather, it served notice that the central bank of the United States would do whatever it takes to reflate the values of stock, bond and real estate assets. Additionally, global fund flows left places like China and other emerging markets to seek better investment returns in the U.S. Did anyone mind that the U.S. recovery had severely underperformed 3%-3.4% expectations at a substandard 2%-2.4% rate year after year? Not really. The weaker the U.S. economic recovery, the more our central bankers would manipulate rates, keeping them lower for longer and pushing asset prices through the roof.
Something changed at the start of 2015, though. And while it may have began with Europe’s trillion-dollar debt-buying extravaganza, China has been more willing than ever to take aggressive steps. Since November, the People’s Bank of China (PBOC) cut interest rates twice. They’ve also lowered bank reserve requirements. And many anticipate more monetary stimulus.