How much firepower is left in this Chinese economic Dragon?

China's growth numbers have been surprising us on the upside, again and again. This second quarter too I will probably be surprised again, of course in the upward direction! (can I still call it a surprise even if I am expecting it to?). Question remains; How long can this go on?

National Bureau of Statistics (NBS) came out with economic numbers for May. Fixed assets investment in Urban areas for May rose 26% in the first five months compared from a year earlier to 3.2 trillion Yuan, the fastest growth of this year, according data release by NBS. NBS also released CPI for May which is at 3.4%, industrial production expansion at 18% and real estate investment expanded 27.5 percent to 721.4billion yuan in the first five months from a year earlier.

All the major economic indicators expanded at a fast pace, from which we can expect second quarter GDP for China to be in line with its first quarter GDP. As before, much of China's economic growth is driven by exports and investments.

Raising the interest rate after record CPI growth seems like a logical action for most economists, but looking at the macro economics is necessary before taking any interest rate action. The recent CPI increase in China was mainly caused by rising prices of Pork and egg, and the market reaction indicates that the investors saw this was unlikely to lead into overall inflation. And the much feared interest rate hike may not come so soon.

The abundant liquidity in the Chinese market is driving up prices in Stock market and in Housing market. This liquidity comes from the foreign currency settlement and the strict control over the capital account. Since China's currency is constantly appreciating, more international money will pour into china if the interest rates were to rise again. That will again feed into the country's liquidity. So the government may need more reasons to hike interest rate at this point.

Besides all these short term factors, take a step back and see why China has done so well so far. This can give you a hint on how long can this growth sustain? Chinese people have inherent value towards industriousness, saving money for future and for their childern, refusal to indulge in extravagance, and continued perseverance towards growing production and manufacturing bases. All these have kept the productivity of the nation very high and hence keeping the inflation at bay.

The political changes happening in the country are extremely conducive for the economic growth. The political parties have rejected dogmatic communism, the government has expanded education programs, improved law and justice to curb corruption, and taken measures to close the gap between rich and the poor.

Owing to the virtues and values of Chinese society and to the encouragement of Chinese government for progressive business environment, the chinese economic dragon will likely to continue to spit fire for now. Unless the chinese government authorities meddle with the economy to cool it down, there should be enough fuel to keep the dragon roaring. As usual, I plan to buy Chinese stocks on dips.

-Nidhi