We need to talk about China...

If you hadn't already guessed, this blog is about the economic powerhouse: China. 

Listed below are some interesting facts just to whet your appetite. However, given the current market turmoil surrounding Donald Trump and his China tariffs, I thought it would be a good idea to clear up some of the myths surrounding China, with the help of our friends at Blackrock Asset Management.

• There are more Christians in China than Italy and the Vatican combined
• By 2030, China will add more new city-dwellers than the entire U.S. population
• By 2025, China will build enough skyscrapers to fill TEN New York-sized cities
• America's fastest "high speed" train goes less than half as fast as the new train between Shanghai and Beijing (150 mph vs. 302 mph)
• China has more pigs than the next 43 pork producing countries combined
• China's economy grew 7 times faster than America's over the past decade (316% vs. 43%)

5 Myths about China's economy 

Economic growth is unsustainable

There is still lots of room for growth

The Chinese economy has been growing quickly for more than 20 years, and hit a peak of 14% in 2007, according to the World Bank. But things have started to slow in the last few years. Growth cannot continue indefinitely and China does have a problem with high levels of personal, corporate and government debt. However, even at today's slower pace of growth at approximately 6% per annum, China will continue to grow more than twice as fast as many developed economies. China has seen growth of 6-10% over the past 7 years. Even a basic level of growth is enough for the financial markets to grow and for domestic reforms to be pushed through. 

High debt means that China is high risk

China is actually reducing debt at a good pace

Many Chinese companies hold a great deal of debt and Chinese corporate debt has reached 165% of GDP, according to an IMF report. (Ireland, Netherlands, Belgium and Sweden have higher corporate debt to GDP ratios!)

The Chinese government is serious about addressing the high levels of debt and has signalled that corporate debt restructuring is now high on the agenda. Whilst this is a positive move for the economy it causes investors to worry about whether the Chinese authorities will be able to engineer a soft landing.  Policymakers have been practical in their approach to reducing debt by making structural changes on one front but also ensuring that there is sufficient liquidity to avoid any stress. It sounds like good financial planning to me. Pay down your debt but maintain a good cash level in case of emergencies.

China also has a very high level of personal (retail) investors in its financial markets, and with such a high percentage the Chinese government is more likely than most governments to intervene should there be any danger of sharp falls in equity markets. Economic hardship can trigger social unrest, and the Chinese authorities do not like civil unrest!

Increased protectionism in the US will hit China hard

Despite what Donald Trump would like to make us believe China is an increasingly important player in global trade

The US-China relationship and some kind of trade war seem inevitable especially under the Donald Trump regime. This will affect international markets, without a doubt.  However, despite all the noise over tariffs the ambitious Belt & Road initiative is still in progress. This is China’s way of boosting trade and stimulating economic growth across Asia by building a massive amount of infrastructure to connect it to other countries.  In addition, the US has walked away from the Transatlantic Trade Partnership and this offers China the chance to play an even bigger role in terms of trade integration in the region. This basically means that whilst America is battening down the hatches, China is opening itself up, making more allies and expanding its global reach of power. 

BlackRock believes that trade tensions between the US and China will continue for a further period but does not think it will escalate into a full-blown trade war, although it does remain a risk.

It is difficult to get accurate economic data about China

"There are more ways than one to skin a cat, so are there more ways than one of digging for money"

Investors worry about the accuracy of economic data that comes out of China.  This is where technology can come to our aid in the guise of satellite imagery. It can provide an alternative source of up-to-date information. For example, it is possible to form a picture of the ‘metalness’ on the ground as a way to measure the number of new factories being built, or existing ones expanded. This information helps to verify the data from the Chinese government. It is also much faster than relying on quarterly valuations.

Surprisingly, this information is so detailed that the economic activity of individual companies can be compared. Big Brother is watching you!

 

China has a liquidity problem

"The tide may be beginning to turn" 

The inclusion of China in the Emerging Markets financial Indices is already starting to see more funds flowing into China. Going forward, more Chinese shares are likely to be added to the indices, driving even more money into the region. 

China already makes up 32.7% of the Emerging Markets Index and will continue to take a larger proportion as China continues to deregulate its capital markets and make them more accessible to foreigners. If China achieved full market inclusion in the Emerging Markets Index, it would account for 50% of the total index of ALL emerging markets and it could eventually account for 30% of the emerging markets bond indices.

The strength of the US dollar together with the extended period of quantitative easing has held money in the US, but that trend is now changing with funds starting to flow back into Asia from the second half of 2017.

There is also a forthcoming Stock Connect scheme, linking the Shanghai and London Stock Exchanges, which will also give foreign investors greater and easier access to the shares of companies listed in mainland China.

 

All these developments, together with the broader structural reforms being carried out within China, may increase liquidity and as these five myths are debunked, the Chinese stock market may start to get the increased international attention it deserves.

As a client of The Spectrum IFA Group, China and other emerging markets will make up a proportion of your portfolio. Whilst the financial markets are highly volatile, the growth of investment is higher than in other developed markets. Yet, it is not a question of whether you should invest in volatile financial markets or not, but more the question of how much you should allocate to them based on your own personal circumstances and attitude to risk.  

The asset managers we work with take care of those decisions on your behalf, so you don't have to.