China – The Great and the Goat17 February 2015
Comment from Victoria Chernykh, Senior Research Analyst at Tilney Bestinvest:
- The long-term China story remains positive, led by secular trends of urbanization, industrialisation and positive demographic change
- China seems to have avoided a hard landing that many expected and in monetary terms, annual growth of the Chinese economy has exceeded that of the US since 2006
- China remains one of the greatest world exporters; translating into USD 2.4 trillion - almost the size of the UK’s economy
- However big risks remain: the Chinese government (not the free market mechanism), controls the foreign exchange rate which could affect other EM currencies
- Furthermore, the staggering growth of the A-share market, the stock market only accessible by Chinese nationals until very recently, could be a bubble ready to burst
- For these reasons, investors need to navigate Chinese equity markets carefully
“China’s influence on the world’s economy is immense. It is presently the second-largest economy in the world and, in monetary terms, its growth rate has exceeded that of the US since 2006 (see appendix tables 1 and 2)*. The long-term China story remains positive, led by the secular trends of urbanization, industrialisation and positive demographic change. Chinese consumers have been rapidly acquiring a taste towards online purchases and, contrary to the slowing growth trend elsewhere, internet retailing and associated technologies, seem to be booming. E-commerce platform Alibaba has expanded rapidly, social networking company Tencent has over 440 million active users (and growing), and search engine Baidu, which is the fifth most visited website in the world, are just a few bright examples within this expanding industry. Furthermore, growth potential is huge - China currently has over 600 million internet users, compared to 277 million in the US and 546 million in Europe.
“China also seems to have avoided a hard landing that many expected. Simultaneously, the country’s economy remains at a crossroads as it attempts to stem its addiction to credit-fuelled growth. Slowing economic growth has forced the government to lower its targets, with Chinese president Xi Jinping describing slower growth as the “new normal”. While growth of the Chinese economy averaged c.10% over the three decades to 2010, in the past few years it has come down to below 7% and the IMF lowered its 2015 forecast to 6.8% in January, pulling down global growth forecast to 3.5% from the 3.8% previously expected. Nevertheless, Chinese growth still exceeds that of all developed economies.
“Despite re-focusing the economy towards domestic growth, China remains one of the greatest world exporters. The table below illustrates that even the falling share of exports relative to the country’s GDP in 2013 still translates into 2.4 trillion U.S. dollars, which is almost the size of the UK’s economy:
|China: Exports of goods and services (% of GDP)|
|% of GDP||28.5||27.3||26.4|
|Value in U.S. dollar (billions)||2,087||2,247||2,424|
* Sources: IMF, Worldbank
“To withstand the slowdown, the government continues to take steps to manage its economic cooling, using targeted ‘mini-stimulus’ measures, adapting to its economic “new normal”. These measures have had some short-term impact but with overall domestic demand remaining weak, signs of a fundamental turnaround have yet to be seen. In the meantime, consensus expectations are for further downgrades of the Chinese economic growth forecast.
“Big risks also remain. The Chinese government (and not the free market mechanism), controls the foreign exchange rate. Potential further actions allowing the renminbi to weaken, promoting exports and fuelling economic growth, could have side effects. The possible outcome could see spill over to other emerging market currencies, and potentially to developed ones like the Japanese yen, thereby creating more volatility and possibly depressing future investment returns. Furthermore, the staggering growth of the A-share market, the stock market only accessible by Chinese nationals until very recently, could be a bubble ready to burst. It is also worth noting that foreign investors continue to drive market movements for most funds non-Chinese investors have access to, also adding to volatility.
“With this in mind, investors need to navigate Chinese equity markets carefully. Return expectations for many funds heavily exposed to China, relative to those enjoyed during the start of the century, have been diminishing to reflect slowing local and global economies. However, we believe that longer-term investors are likely to be rewarded for their patience and risk-taking with this world superpower. Funds we currently like include Schroder Asian Alpha Plus, First State Asia Pacific Leaders and Aberdeen Asia Pacific Equity which invest both in China, but can also take advantage of opportunities from elsewhere in Asia.”
Appendix: In monetary terms, the Chinese economy's growth rate has exceeded that of the US since 2006:
|Table 1: China|
|Gross domestic product, constant prices||Percent change||%||10||12.7||9.3||7.7||7.7||7.5|
|Gross domestic product, current prices||U.S. Dollars||Billions||856||2,713||7,322||8,229||9,181||10,028|
|Gross domestic product: approximate annual change in U.S. dollars||U.S. Dollars||Billions||86||344||681||630||704||756|
* estimates Source: IMF
Table 2: The United States
|Gross domestic product, constant prices||Percent change||%||3,796||2,667||1,847||2,779||1,878||2,768|
|Gross domestic product, current prices||U.S Dollars||Billions||8,100||13,858||15,534||16,245||16,800||17,528|
|Gross domestic product: approximate annual change in U.S. dollars||U.S Dollars||Billions||307||370||287||451||315||485|
* estimates. Source: IMF
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