Our Opinion: 2015
China falls again
Following a few weeks respite, concerns over flagging Chinese growth came back to haunt global markets today.
There is widespread uncertainty over the extent of the slowdown in China, a key driver of global growth in recent years. Beijing’s devaluation of the yuan this summer, however mild, suggested that they were very worried about the outlook – a fear apparently confirmed by last week’s news that the manufacturing sector is shrinking at its fastest pace since 2009.
To make matters worse, the government badly mishandled the decision to devalue and the recent stock-market crash. Its futile efforts to prop up the market dented confidence in the regime, hampering the economy further.
China used 11% of the world’s oil last year and 57% of its copper. With growth slowing, demand for commodities has ebbed too, undermining momentum in commodities exporters such as Brazil and Russia. Meanwhile, most other Asian countries have close trade links with the country.
In addition, the prospect of higher US interest rates has been drawing global cash away from traditionally risky assets such as emerging markets, driving currencies down and cutting prices. Some economists believes that deflation will spread to the industrialised world via lower import prices as emerging economies race to devalue their currencies – a “currency war”. With inflation already barely positive in much of the developed world, a deflationary Japan-style slump – where falling prices would increase the “real” value of our still-huge debts – is a distinct possibility.
With many companies in major developed-world markets making most of their sales overseas, with a fast-rising share going to developing countries, it’s no wonder they’re suffering. Deutsche Bank reckons that China accounts for 15% of profits at large German companies, for example.
The Economist reported that investors should not get carried away. Whilst the data show that China is slowing, it’s not collapsing. Amid all the drama, few appear to have noticed that the Chinese services sector, which eclipsed manufacturing two years ago as the biggest part of China’s economy, is looking healthy, with a survey tracking activity in the sector reaching an 11-month high in July. “China is not just about heavy industry.”
Meanwhile, the property market is coming back to life. “The property crash is already a memory,” said Ambrose Evans-Pritchard in The Daily Telegraph. House prices have risen for three months and sales were up 18.9% year-on-year in July. “This matters more than anything happening on the Shanghai stock market.” Credit-ratings agency Moody’s calculates that the housing market and related industries comprise 25% of Chinese GDP.
The developed world isn’t exactly in crisis either, as Patrick Hosking notes in The Times. America and Europe, which jointly account for 40% of global GDP compared to China’s 15%, have strengthened in recent months. And the slump in commodity prices amid China’s slowdown is “a blessing, not a curse”. Firms and households will have more money to spend and invest.
China is not a developed market and shouldn’t be viewed as one by investors. It isn’t collapsing but is slowing down. As an emerging market, it will be drawn to rebalance its economy away from one focused on super-fast growth that benefit relatively few. Markets will remain volatile and certainly not for the faint-hearted. However, the long term outlook for this giant global economy remains sound and the discretionary fund managers we work with continue to include exposure to China for clients with the appropriate risk profile.