China’s economy expanded at its slowest pace in 24 years in 2014. A slump in the property market has constricted domestic demand. As a result, policymakers are satisfied with pursuing more modest growth targets. Economic reports have consistently indicated weakness and the GDP report is only the latest in a series.
GDP Slips
According to official data, China’s economy registered growth of 7.4% in 2014. This is significantly lower than the level of 7.7% achieved in 2013. Weakness in the property market, which is a key demand driver domestically, has remained unchanged despite a number of policy initiatives. Additionally, data on lending indicates that investment levels continue to be low.
Also, policymakers are worried about the emergence of a deflationary cycle. The situation has worsened following low levels of demand and industry overcapacity. Meanwhile, local self-governments face high levels of unsustainable debt. This can again be traced to a property market slump since these bodies depend on property sales for a significant portion of their revenues.
Is a Recovery Forthcoming?
Though GDP numbers may look dismal at first glance, the actual situation may not be as bad. Growth is only slightly short of its official target of 7.5%. Also, fourth quarter growth is flat at 7.3% compared to the year-ago period and a shade better than estimated.
Additionally, it was widely expected that China would fail to meet its growth target of 7.5%. This is why the figure achieved may be quite good considering only recently the credit situation was worrying, bad debt had increased sharply and economic indicators were all indicating a slowdown.
However, a series of targeted stimulus measures, ultimately followed by monetary easing, seems to have salvaged the situation. At the same time, the debt situation, one of the major concerns for China’s government, seems to be sustainable.
Further Stimulus Measures
Overall, economic reports have been upbeat in December. Retail sales have exceeded predictions to increase 11.9% while factory output has done the same, growing 7.9%. Also, December housing sales have increased 4.2% year-over-year. This is primarily because rules on mortgages have been relaxed across the country.
Given that China’s economy is widely expected to dip to 7%, further stimulus measures seem likely. However, there are differing views on how this can be achieved. Some economists believe that there is need for further monetary easing. A further rate cut may happen along with a reduction in required reserves.
Others believe that policymakers will be content with a modest level of growth. They will be satisfied with a period of growth stabilization, attempting to reduce financial risk in the meantime.
Our Choices
Despite a decline, China’s economic growth still outpaces most others across the world. Also, the comparison to figures recorded 24 years ago may not be altogether justified. This is because the size of the economy has expanded considerably since then. Despite the recession of 2008, the country’s GDP has jumped to nearly $10 trillion from $1 trillion in 2000.
At the same time, the country remains the world’s largest energy consumer. Below we present two stocks which will gain from these trends, each of which also has a good Zacks Rank.
Huaneng Power International, Inc.’s (HNP) principal operations are related to producing, distributing and selling electricity and heat to regional and provincial companies which operate grids in the People’s Republic of China as well as Singapore. It also operates cargo transportation services in coastal regions as well as port management services.
Huaneng Power holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 24.7%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 8.48.
JinkoSolar Holding Co., Ltd. (JKS) is a designer, developer and producer of photovoltaic products. These products are marketed within China as well as in foreign markets. JinkoSolar’s products include solar modules and cells, silicon wafers and ingots, among other things. It also undertakes commercial solar power project development and solar system integration services.
Apart from a Zacks Rank #2 (Buy), JinkoSolar has expected earnings growth of 35.6% for the next year. It has a P/E (F1) of 4.88x.
There are indications that the world’s second largest economy is ready to turn the corner. Additionally, the government continues to take measures to keep growth on track. Given these factors, adding these stocks to your portfolio would be a prudent choice.
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