China’s economic outlook in the year of the rooster
As we look ahead to 2017 and consider those factors that will influence our investment strategy and decisions, China will continue to have a significant impact. It’s sheer size, scale and development affects the world’s markets and economies – as well as influencing some of the companies that interest investors the most.
In China, 2017 is the year of the rooster – a year to work hard and be patient, yet spend time in solitude and harmony with friends and family. People will be more polite, but may complicate things.
Take the property market. Some believe it is overheating, as house price inflation was the highest ever recorded in September 2016. While this was initially limited to the Northern provinces, it’s spreading to smaller cities, which account for most transactions.
Other experts believe the sharp increase only affected a few cities and, overall, prices have risen in line with income. In any case, even a price collapse wouldn’t cause undue economic problems. And, while the ratio of house prices to income is high, this characteristic is shared by many cities – including London and New York.
How will China’s economic outlook impact investment strategy in 2017?
It’s highly probable that the property rally in China will end. Conditions will soften over the next 6-12 months – but commentators are considering whether ‘bubble’ conditions exist and whether any slowdown will seriously affect China’s economic outlook.
At the least, any slowdown in the property market will revive ‘hard landing’ fears, but we believe this is unlikely to happen. First, no-one credits China’s official GDP figures; it’s commonly accepted that the economy is growing more slowly than they suggest. Second, these fears have been around for years, yet the economy is still expanding. In 2008, the catalyst for a hard landing was expected to be an Olympics ‘disaster’; in 2011 it was the growth in shadow banking and spike in food inflation. Neither has happened.
The other highly divisive issue is corporate debt, as Beijing has seemingly resorted to massive lending to boost economic growth.
Again, any analysis of headline numbers needs caveats. First, it’s not just the debt level that causes concern, but the speed with which these liabilities have accumulated.
Chinese debt was 148% of GDP at end 2007, and had grown to 255% by end 2015. However, most problem loans have been made by State-controlled banks to State firms – basically the Chinese Government lending money to itself. Much of the increase has also been concentrated in sectors related to infrastructure stimulus – a strategy for which Donald Trump has been lauded!
Chinese policymakers have tried to deleverage and rebalance the economy, reflecting a desire for more sustainable growth centred on consumers – but every time growth slows, they fall back on debt-fuelled investment as a stop-gap. This can’t continue, and President Xi Jinping has suggested he’ll forgo the growth target as supply side reforms are implemented.
Rebalancing won’t be a smooth process, but the trend is clear. As far as growth is concerned, the slowdown in economic expansion reflects the fact that the economy is significantly larger than a decade ago.
We see any negative market reaction to China’s economic outlook as a potential opportunity to consider further investment. Let the dragon welcome the rooster.