Economists have often said “when America sneezes, the world catches a cold” reflecting the importance of the US to the global economy. But the past 12 months suggest the world’s immune system is more sensitive to China’s sniffles than was previously thought.
The country’s economic slowdown and the overdue lancing of the bubble in its stock market have made the world’s central bankers and policymakers realise that China now has a huge influence on global markets.
I was in Beijing and Shanghai last week, in part to attend the G20 summit in my role as a board member of the Institute of International Finance, but also to see for myself what is happening in China. There is no substitute for visiting a country if you really want to understand what is going on there. Get there, meet companies and policymakers and listen to what the people you meet have to say.
This is especially the case with somewhere like China because it can be opaque and a lot of what is written about the country is nonsense. You can only get so much information to form a view from sitting in an office 6,000 miles away.
One of my most interesting meetings was with Dr Pan Gongsheng, deputy governor of China’s central bank. It is true that the economy is slowing. Never mind the validity of the official figures, the 6.9% growth achieved last year is a far cry from the double-digit expansion achieved a few years ago.
But is this slowdown really so bad? The change in the pace of growth is as much by design as by accident. China’s policymakers made a deliberate decision a few years ago, to move the economy away from an investment-led, export-driven model towards one in which domestic consumption plays the dominant role. The country’s leaders want growth that is sustainable.
The country’s leaders want growth that is sustainable.
For a long time investors have focused on China’s manufacturing data as an indicator to how well or badly the economy is doing. Recent weakness in the manufacturing data has been interpreted as a big negative and has ignored the growth of service industries, especially in the private sector.
Real estate, finance, hospitality, retail, transport, construction and other services accounted for some 55% of GDP in 2014, up from 47% in 2006, according to data compiled by CLSA and Citic Securities.
As the economy continues to move to a more domestic focus, this share will continue to rise. This is not to say everything is rosy in China. In recent years, western leaders watched with wide-eyed wonder at their Chinese counterparts’ handling of the economy. They looked on in envy at Beijing’s ability to manage the economy at a time when the world seemed to be closing in.
That reputation has taken a major dent recently. They successfully deflated a bubble in the property market but that meant that China’s army of retail investors piled into the domestic stock markets. The authorities should not have tried to prop this over-leveraged and speculative bubble. They should have let it pop but chose to intervene and then did so in a messy, unclear and unsuccessful way.
While they were bungling the rescue of the stock market, the authorities made a mess of communicating a loosening in renminbi policy, which fuelled suspicions the country was seeking to devalue its way out of trouble. This is prompting wealthy locals to move their cash offshore and in response the government is making it harder for money to be moved overseas.
Local government and corporate debt are big problems, the state sector is bloated and inefficient, while the property market remains fragile. While my trip provided comfort on the state of the economy, my views on the stock market remain unchanged. We have always been very cautious about investing in Chinese companies because so many are opaque and many have woeful corporate governance.
Local government and corporate debt are big problems, the state sector is bloated and inefficient, while the property market remains fragile.
It’s obvious if you spend time in China to see that the Shanghai and Shenzhen stock markets operate like casinos. Trading activity is dominated by retail investors who buy on rumours and flee at the first sign of trouble. It’s much more sensible to expose yourself to China’s growth by investing in companies which aren’t based there but do business there.
It’s a much easier way of investing in companies with decent growth prospects, that have quality management and adhere to good levels of transparency and accounting standards. From speaking to companies, economists and analysts in China, it’s clear to me that the country is heading for a softer, rather than harder, landing. You need to look beyond the stock market for the clues of why, though. China’s consumer spending is still motoring. Consumers have taken to internet shopping at a startling pace.
Barely 15% of the population had shopped on the internet a few years ago. Now over 40% have. Chinese shoppers spent nearly US$8bn (£5.7bn) in the first 10 hours of the country’s equivalent of Cyber Monday or Black Friday. Chinese authorities might have lost some of their reputation for financial competency, but they have US$3.4 trillion in foreign exchange reserves to soften the blow of a slowing economy.
Unlike many policymakers in the West, those in Beijing still have plenty of tools at their disposal to avert economic disaster and to help the country to develop. The announcement last week of the opening up of the bond market to long-term international investors is a prime example and is a step in the right direction.
Ultimately China will shake off its current sniffles to continue to be a driver of global growth for decades to come.
This article originally appeared in The Sunday Telegraph on 28 February 2016.