China will bounce back to drive global growth

The Pak Banker - - OPINION - Martin Gil­bert

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 6.9pc growth achieved last year is a far cry from the dou­bledigit 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 in­vest­men­tled, ex­port-driven model to­wards one in which do­mes­tic con­sump­tion plays the domi- nant role. 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 55pc of GDP in 2014, up from 47pc 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. Whilst 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. 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.

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