Pes­simists ig­nor­ing China’s strengths may lose out

China Daily (Hong Kong) - - BUSINESS VIEWS - OLIVER BAR­RON The author is head of the Bei­jing branch of Uk-based in­vest­ment bank NSBO.

China is slow­ing. Re­peat, China is slow­ing. Is China’s an­nual growth go­ing to fall be­low 7.5 per­cent? Can the econ­omy con­tinue to func­tion at 7 per­cent? Dare we ask what would hap­pen if the econ­omy slows to 6.5 per­cent? Won’t the wheels come off if it slows any more?

If you talk to a port­fo­lio in­vestor, it seems that China has no way out. The ar­gu­ment is that, since China has too much debt that needs to be re­paid, a slow­down is not an op­tion be­cause slower growth means less rev­enue that can go to­ward pay­ing back debt.

On the other hand, if the coun­try keeps grow­ing fast, it will only add more debt that can’t be re­paid, as each ad­di­tional yuan in­vested be­comes less pro­duc­tive. It presents a sort of “damned if you do, damned if you don’t” sce­nario.

There is a lot of pes­simism about China’s cur­rent sit­u­a­tion. Take a step back, how­ever, and you will see that the peo­ple mak­ing th­ese com­ments, whether they are me­dia or fund man­agers, do not have a lot in­vested in China’s fu­ture. When you look at those who have in­vested in its fu­ture, a dif­fer­ent, more op­ti­mistic pic­ture be­gins to emerge.

As China’s growth has slowed this year, from 7.9 per­cent in the fourth quar­ter of last year to 7.5 per­cent in the sec­ond quar­ter of this year, for­eign di­rect in­vest­ment has been in­creas­ing, ris­ing from the pre­vi­ous year in each of the past five months and grow­ing by 20.1 per­cent in June to $14.4 bil­lion, the fastest pace in two years.

There are clearly many rea­sons to be op­ti­mistic about the long term. China is no longer just the world’s man­u­fac­tur­ing base, plus ris­ing wages in a coun­try of 1.3 bil­lion peo­ple who have shown an affin­ity for buy­ing lux­ury goods makes China a mar­ket that can’t be over­looked. The ar­eas where for­eign in­vestors are fo­cus­ing are now re­flect­ing this change in men­tal­ity. Man­u­fac­tur­ing for­eign di­rect in­vest­ment, which his­tor­i­cally pro­duced goods for ex­port, fell 2.14 per­cent year-onyear in the first six months of this year, while FDI in the ser­vices sec­tor rose 12.4 per­cent year-on-year.

Short-term fac­tors are also driv­ing FDI, and they can be ex­plained by look­ing at its sources. Asian economies, as usual, ac­count for the largest share of FDI. Of greater im­por­tance is the fact that FDI from the three ma­jor economies the Euro­pean Union, the United States and Ja­pan

is ris­ing quickly, up 14.7 per­cent, 12.3 per­cent and 14.4 per­cent yearon-year. Of the three mar­kets, the most no­table is clearly the EU, which was the only mar­ket that saw FDI fall in 2012.

It could be ar­gued that the change in EU FDI re­flects the im­prov­ing econ­omy, as busi­ness ac­tiv­ity in the eu­ro­zone ex­panded in July for the first time in 18 months. But this con­clu­sion seems a bit pre­ma­ture. De­spite some pos­i­tive data, un­em­ploy­ment is at its high­est level since the euro was cre­ated, pub­lic spend­ing is low be­cause of con­tin­ued fis­cal aus­ter­ity and banks re­main re­luc­tant to lend. It is not out of the ques­tion that Greece, Cyprus and Por­tu­gal could need fur­ther bailouts while, in France, the sec­ond largest econ­omy in the re­gion, growth is ex­pected to de­cline for the full year 2013.

As the out­look for Euro­pean growth re­mains murky, com­pa­nies there have lit­tle to gain by in­vest­ing do­mes­ti­cally, mean­ing they must look over­seas. And with un­cer­tainty over whether Abe­nomics will work in Ja­pan and whether the US has re­ally turned the cor­ner, you must in­stead look to the place that can gen­er­ate the most sta­ble growth in the next few years. Tak­ing this into con­sid­er­a­tion, there may be no bet­ter place to in­vest right now than China. Al­though the Chi­nese govern­ment is al­low­ing growth to slow, the slow­down will only go so far. The govern­ment must al­ways en­sure the econ­omy grows fast enough to pre­vent ma­jor job losses in or­der to avoid so­cial in­sta­bil­ity. This means there will al­ways be a floor to growth.

Be­cause of this, no mat­ter what hap­pens in Europe, the US or any other econ­omy, com­pa­nies will con­tinue to al­lo­cate cap­i­tal to grow­ing mar­kets. China will be a sig­nif­i­cant ben­e­fi­ciary.

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