CAPE TOWN – In the wake of the recent market volatility a lot of the talk has been about the Chinese economy. Much has been made of how China is coming off the boil and may even be in some kind of crisis.
Headlines around the world tell a story. “The Chinese economy is on a slippery road to nowhere” was one in Australia, while MarketWatch carried the warning that “China’s economy may be in worse shape than people think”. The Wall Street Journal even ran an article under the headline: “A global recession may be brewing in China” and Forbes asked “Will China collapse?”.
The largely accepted narrative is that China’s economy is not only slowing, but also heading into a debt crisis. The big drop in Chinese stocks during August and the decision to devalue the yuan have been taken by many as confirmation that the economy is in big trouble.
However, this view is not universal. Although largely drowned out by the negative sentiment, a number of other headlines propose a different view of the situation.
And according to Dr Martyn Davies, the managing director for emerging markets and Africa at Deloitte Frontier Advisory, the panic is indeed ‘all wrong’.
“I’ve heard commentators say that China is not growing at all, but that’s nonsense,” Davies says. “The fundamentals of China’s growth have not changed. There are problems such as rising debt levels, but China is not falling off a cliff.”
While he acknowledges that the Chinese economy is changing, he says this is something that will play out over many years. It is not a sudden, disruptive event.
“China rebalancing is a long term story, it’s not a short term impact,” he argues. “People are sweating the detail of China’s growth, but in reality that is a red herring discussion.”
He points out that concerns around China are usually rooted in what has happened to the commodity cycle. Most people assume that the significant drop in commodity prices has been due to a similarly big fall in Chinese demand.
However Davies says that this conventional wisdom should be thrown on its head.
“It’s not a demand issue, it’s a supply issue,” he argues. “The quantum of Chinese commodity imports has not dropped at all this year. The reality is that we are looking at a heavily over-supplied market.”
He says that massive over-investment by miners when prices were high has led to chronic over-supply. That has been the critical factor influencing commodity prices.
Davies also argues that too much is made of China’s future growth outlook. The discussion around the country’s growth rates tends to ignore a critical part of the equation, which is the absolute size of that growth.
“Everyone is focused on the speed rather than the size,” he says. “They forget that China’s economy today is more than double the size it was in 2007.”
He points out that in 2007 China’s economy was around $5 trillion. If it grew at 10%, that would in theory have added $500 billion in new economic activity.
Today, China is a $10 trillion economy. If it grows at 7%, that would equate to $700 billion in new economic activity.
“The 7% growth on an economy of $10 trillion is singularly higher than 10% growth on a $5 trillion economy,” Davies says. “But more than that, China is moving from an unsustainable investment-driven economy to one that is more balanced.”
He points out that fixed capital investment in China is currently at 47% of GDP. That compares to South Korea at around 30%.
“That is unsustainable and everyone knows that, including the Chinese,” says Davies. “They want more balance, which will come from areas such as consumer goods, exports, and particularly from services. That will predominantly be from private business, which already makes up the mainstay of GDP contribution in China.”
He adds that talk about the reliability of economic data coming out of China is also overdone. While others are questioning the growth rate numbers coming out of that country, Davies feels one shouldn’t make too much of it.
“Whether it’s over- or understated doesn’t really matter,” he says. “China’s growth was understated in years gone by because they have always inclined towards a median of around 8%. When it was at 12% they wouldn’t say that because policy makers like to project a steady band.”
On the whole, his outlook on China remains positive.
“People seem to think that China will go from 7% to negative growth overnight,” says Davies. “If you read the headlines, that’s what you might think is happening. But there is no hard landing.”