The tide is changing
It is unusual that headlines, and not economic data, for more than one year primarily founds the perception of a country’s economy. This however has been the case for China and the country’s economic outlook this year. During this second quarter, it is my expectation that especially European investors will have to move towards a more balanced view of China’s economy. It will actually be a big change since a large part of the financial markets have focused on a “hard landing” for China’s economy. A balanced view of China’s economy will lead to the natural consideration of which investments to focus on instead of avoiding China.
I will describe the big uncertainty about China’s economy during the past year as a cocktail with many ingredients. Naturally, it has a consequence for an export nation like the Chinese when global growth and trade is under fire which results in a degree of uncertainty about the economy. But no country on the globe can boast of having an economy that is pure sunshine. Therefore, also China has challenges that reasonably lead to different assessments of the country’s economic strength.
CHINA’S ROBUST RETAIL SALES
Among many analysts and economists, this has though rather led to a discussion for or against the Chinese economy and about having China in the investment portfolio or not. I argue, that in relative terms China still has a better fiscal and monetary maneuver room than the majority of other countries. At the same time, I have been unable to find evidence of the alleged extremely critical situation that China’s economy should be in if one trusts the many headlines the past year. On the contrary, the development in the housing market and the service sector is pretty strong. Even the production sector is actually showing a positive trend. Graphic one shows the development in various PMI readings, both from Caixin and China’s official statistics. As generally known, the service sector is in an expansive phase though I will mention that we do not perceive the development as extremely expansive. The interesting development is currently in the manufacturing sector, which has the highest PMI reading in more than a year. This is in contrast to the general picture many media have been painting in their coverage of China. On Friday the 15th April the GDP growth for the first quarter was published to be 6.7 pct. as expected. I take it as another sign that the economy is more stable than the general impression is.
The week, when China celebrated New Year in February, showed a consumption increase of 11 pct. compared to 2015 which indicates a stable consumption appetite. The increase in retail sales in January and February in rural areas increased by 10.9 pct. and thereby meets the expectations. During the same months, the retail sales in urban areas only grew by 10.1 pct. which is noted. In March the annual increase in retail sales for the whole of China increased more than expected by 10.5 pct. (graphic two) indicating that the consumers are doing fine. We do carefully follow if the wage increases and bonus payments are under pressure due to the headwinds in China’s industrial sector. This could, of course, hurt private consumption but so far we don’t see any indication of this risk.
Interestingly graphic two is also a response to last year’s big discussion about whether the wild moves in China’s domestic stock market would affect private consumption or not. The yearly increase in retail sales actually fell slightly as the stock market rose in the first half of 2015. Conversely, retail sales increased more during the period when the stock market collapsed in the second half. As already claimed last year there is no consistency between the stock market and private consumption. Along with the fiscal maneuver room and the fairly good domestic economic conditions China’s economy is able to compensate for the global economic headwinds which I expect increasingly will attract investors’ attention this year.
THE ONLINE SALE BOOM CONTINUES
In China, the online retail sales “e-tail” now makes up 12 pct. of the total retail sales which is a higher share than in many other countries. If growth in the Chinese e-tail continues this year the total turnover through the internet increases from about RMB 4 billion in 2015 to RMB 5 billion this year.
The development currently taking place in China’s e-tail describes how incredibly fast the economy changes direction. Despite the overall size of China, many trends in the domestic economy develop more rapidly than in many other countries especially compared to Europe. This is demanding for investors to follow but on the other hand, it does constantly create new opportunities for the investors oriented towards China.
The explosive growth within e-tail has a macroeconomic impact. Part of the turnover is not registered by China’s official statistics as many new e-tail companies are too small. Moreover, the service sector is growing significantly in China where a part of the growth also is generated by small start-ups as well. These developments create a more dynamic economy than many often think, but it also impacts the uncertainty about China’s economy. There is an ongoing discussion about how much China’s GDP growth is glamourized, which probably happens in some provinces. But the growth in services and e-tail not recorded in the statistics must be added to the GDP growth. It is another argument why I expect the financial markets will move towards a more balanced view on China and thus turning the tide for China and the general perception of the economy.
