Economic Thoughts: Rejigging Chinese assumptions

There is a deep anxiety about China that may be wildly overdone.


China’s financial markets, to put it mildly, are rather immature. Post-2009, the Chinese stock markets did very little, still smarting after earlier excesses, but then from mid-2014 started to lift and thereafter take off spectacularly, in one of those typical uncontrolled bursts of euphoria, drawing millions of new Chinese investors into the market, opening new trading accounts, expected to grow rich quick (with a million new paper millionaires created within a year).


With equity valuations driven to frenzied heights, in some instances company price/earnings ratios “in the thousands”, all this excitement pulled in a lot of new blood, many of them borrowing heavily, trading aggressively on margin.


In the nature of such bubble markets, the end comes with a vertigo Minsky Moment, enough take fright as valuations cannot be sustained, and the whole process reverses itself as fear takes over, and selling out predominates.


It had happened in 2007-2009, and it happended again in 2014-2015, with long flat-earth stretches before & after. Nothing ever in moderation over there.


Perceptions about these wild equity market conditions in 2015 were globally extended to the Chinese economy itself. Commodity prices had long been in heavy decline, key physical indicators (electricity, steel, cement) were off heavily, exports & imports were down, the financial system (banks, property) seen long as overwrought, and the fashionable story being that you can’t believe official data (supposedly massaged to make things look better than they are). Adding it all up yielded a very negative reaction.


Global markets judged China as an economic story to be yet a bigger sell, reinforced by perceptions of policy weakness (the attempts to prop up equity prices through government orchestrated purchases, followed by a mini-Yuan devaluation). The hysteria, frankly, grew in the telling.


To the point of no longer wanting to believe in the China growth story. Officially this year still gunning for 7% GDP growth, but with leading global institutions competing to pitch that in the 6%-7% range, and many more convinced it is much (much) lower.

September trade data released yesterday weren’t encouraging, with Chinese exports down 3.7% yoy, and imports a whopping 20.4% down. It keeps feeding an extremely negative global sentiment about China, and this extended to the many global dependencies that have come into being over time.


Thus commodities of all kinds, with China today dominating offtake, being sold off yet further, and especially Aussie & Kiwi currencies suspect, with the largest part of their (commodity) exports going to China. But the sentiment extends much wider, also regionally to manufacturing hubs, such as Japan, Taiwan & Singapore in technical recession (two consecutive quarters of GDP decline).


The weakness affects key European companies, and much of Africa, also via the halved oil & gas prices.


Having said all that, the reported Chinese trade data is in Dollars, and the weak imports are almost entirely due to falling (Dollar) prices. It is like reporting on SA oil imports, and noting an import bill that in the 12 months to mid-2014 was still $20bn was in the subsequent 12 months down to $10bn. Hello, that’s good news, not bad (if it happens for the right reasons, as also still suggested for Chinese imports).


And this repeats itself in various other ways, too.


The global sceptics suspiciously question the official 7% GDP growth forecast and in that context are willing to accept the dismal government-generated data for construction (down 15% yoy in August) and steel (down 4% yoy), yet are not willing to buy the official 10% retail volume growth of consumers, with enough anecdotal evidence to suggest its ongoing strength is as real as the heavy industry weakness.


China has been in transition for years, the story is by now well known, and it has clear consequences. They are putting less emphasis on infrastructure & heavy industry investment and its export dependence in a slowed world where China is already dominating many export markets.


Instead, the call is for a more sustainable growth strategy, focused on the unlimited potential of its own population, as labour moving up the sophistication ladder, and as consumers able to greatly improve their lifestyles through higher incomes. And this accompanied by a greater awareness of environmental concerns, with pollution in China pushed to levels unacceptable in the long term.


And so their investment push into infrastructure & industry is slowing, or even falling, they have surplus capacities that they use for dumping product abroad (cloudburst exporting, originally beloved by Japanese, going back to similar circumstances for her in the 1970s).


Meanwhile, Chinese households continue in the main to work & earn growing incomes, supporting ongoing retail sales growth of nearly 11%. This remains an important prop underneath its economy, even if some (luxury) segments have turned more cautious of late.


The global dependencies on China, as much commodity producers as regional Asian manufactures exporters, have to engineer a structural turn, too, accepting that China won’t any longer be quite the euphoric export destination of yore underwriting exceptional fixed investment projects at home. These countries in turn have to reinvent their growth stories to the extent they have become dependent on China. In the process, one would expect their currencies to be sold, and reach undervalued levels, as they have.


This global adjustment to China’s changing fortunes has been underway for at least half a decade, with another half to go. The 2020s should in this respect be a much more stable one than the 2010s.


One can only express wonder about SA politicians in this decade turning towards China, seeking greater trade exposure. It is as if they didn’t see or hear change coming, with so far no indication of a change of mind.