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3 Reasons Why A Chinese Slowdown Shouldn’t Worry Standard Chartered PLC

Piggy bank

It’s difficult for many investors (me included) to understand why annual GDP growth of 7.4% is seen as a disappointment. Indeed, for investors in the UK, even half of that level would be superb and would be likely to push confidence (and the stock market) ever higher.

However, for China, 7.4% annualised growth in the first quarter of this year is a slight concern as it is the lowest level of growth in 18 months. Furthermore, it is also slightly below the country’s 7.5% target growth rate for 2014, so the disappointment stems from it being below expectations rather than from it being a low absolute number. This, though, should not be a concern for emerging market-focused Standard Chartered (LSE: STAN). Here’s why.

The Next Stage Of Growth

Although China is targeting growth of 7.5% this year, no country has ever been able to maintain such a level into perpetuity. Indeed, China may find it increasingly challenging to sustain such a rate, simple because it is transitioning towards consumer-led growth rather than investment-led growth.

For instance, in previous years China spent vast sums on the building of new infrastructure across the country. This boosted economic activity and, as a result, achieving double-digit growth was well within reach. However, the country is evolving and is now more focused on increasing consumer spending and the development of Chinese brands. Although this will also generate a significant amount of economic activity, it could be difficult to top or even match the growth rates posted during the investment-led growth phase.

Why That’s Good News For Standard Chartered

Consumers need credit and the fact that a country with around one billion inhabitants appears to be in the early stages of consumer-led growth bodes well for companies that provide credit. Therefore, Standard Chartered, with its strong ties to the far east, appears to be in a great position in which to benefit from the increased demand for credit (and the fees and charges it will receive for doing so). In fact, it could be argued that the consumer-led growth phase could be more profitable for Standard Chartered than the investment-led phase has been.

Looking Ahead

Despite this potential, Standard Chartered trades on a price to earnings (P/E) ratio of just 10.4. This is well-below the FTSE 100 P/E of 13.3 and shows that further disappointment with regard to emerging market growth numbers appears to be priced in.

Therefore, with Chinese growth still being well-above anything that the developed world can match, Standard Chartered having the potential to benefit from it via consumer-led growth, and shares in the bank having a low P/E, Standard Chartered appears to be in a strong position to make gains in 2014.

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Peter does not own shares in Standard Chartered. The Motley Fool owns shares in Standard Chartered.