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Why China's Growth May Be a Mirage


Some strategists don't believe the hype.

Open up that fortune cookie and the message couldn't be simpler: The Chinese economy is going gangbusters.

The boys in Beijing managed to drive home a near 9% real GDP growth rate in the third quarter. More evidence that the economy over there is revving up: The latest Purchasing Managers' Index rose to a seasonally adjusted 55.2 in October from 54.3 in September. A reading above 50 suggests expansion.

An index of export orders climbed to 54.5 from 53.3. Interestingly, there was also a jump in the import index to 52.8 from 50.7, demonstrating a pick-up in domestic demand.

Investors liked what they heard: In afternoon trading on Monday, the iShares FTSE/Xinhua China 25 Index Fund (FXI), an exchange-traded fund that tracks 25 of the largest Chinese companies, climbed 2.2%.

The FXI is up 69% in the past 12 months.

Other data coming out of China recently has been equally dramatic, economists emphasize: Real retail sales are running at 16.5%; car sales are up 78% year-over-year; 2.6 million TV sets were sold between September 26 to October 8 -- up 120% on a year-over-year basis.

Proud of the super-sized flat-screen in your living room? Don't be. The average Chinese family now has a flat-screen TV larger than yours: 37 inches there versus 33 inches here.

Could there possibly be a clearer sign of Pax Americana's decline?

But, before signing onto the well-told story of the China miracle, we checked in quickly with a couple of contrarian investment pros that don't believe the hype when it comes to China.

These strategists laid out what they consider the risks, as they see it, for our brothers in Beijing.

The Chinese economy is booming, no doubt, but the key question to answer is whether this growth is natural or due to massive fiscal stimulus. Indeed, this is exactly what worries Vitaliy Katsenelson, vice president and portfolio manager with Investment Management Associates in Denver.

"The government in China is afraid of the economy slowing down," Katsenelson tells us. "Remember, there is no social safety net there. High unemployment means hunger and riots. This is why China had such a huge stimulus package."
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