The China bear narrative has kicked into full gear from the front page of the Wall Street Journal’s dire warnings to the constant chatter on financial television about the chilling impact on the global economy.

The glass half empty argument is straight forward: GDP came in at 9% - significantly below growth levels in previous quarters and below consensus estimates. Industrial Output is cooling -something that the commodities markets (particularly copper) have already been telling us for months, and the global slowdown is hurting Chinese exporters. Today the Ministry of Finance announced increases in export rebates for manufactures of consumer products like textiles and toys to help offset slowing demand from the US & EU. A bleak picture.

Our, somewhat contrarian view is that all of this signifies a shift in the nature and trajectory of Chinese growth, but not its direction. Retail sales held in strong for September as both consumer and producer inflations levels came down. It looks clear to us that China’s economy will redirect towards domestic consumption as its primary driver. This transition will not be without hiccups - greater seasonality and more modest near-term growth rates for starters, but it should also enjoy the benefits of a more diversified base and the potential for sustained long-term growth as domestic consumer markets in the central and western provinces continue to develop.

Currently we are continuing to hold our FXI position although it is almost 4% below our entry point. We often find ourselves taking a contrarian stance, but that is not because we seek it out. If the fundamental data points for our China thesis deteriorate than we will adjust our opinion, but for now the glass appears more than half full to us.

Andrew Barber

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