Concern over Chinese slowdown overstated

Fears of a slowdown, high inflation and export dependence are increasing concerns about China. Social and political risks, along with overinvestment and low consumption are also causing anxiety, says Kristina Sandkleft, macroeconomist for Asia at East Capital, which manages approximately €3.5bn in assets.

“Chinese growth is still very healthy,” she says, referring to the actual GDP growth, which has consistently been higher than the official growth target. East Capital believes China’s growth will hover around 8 per cent this year.

The investment firm is bullish, as inflation is coming down as a result of decreasing food prices, as is China’s reliance on exports. “China’s dependence on exports is less than many investors believe, and has been falling since 2006,” says Ms Sandkleft.

“We should acknowledge that China’s economic growth is slowing, but we should also remember that the economy is slowing from levels that were close to overheating the last couple of years with fixed asset investment booming.”

CURBING INFLATION

Growth of only 9.3 per cent in April, she feels, is not so bad, and may be partly created by the Chinese government. “A year ago, inflation was rising and the Chinese government implemented policies to control inflation and also to curb rising real estate prices,” Ms Sandkleft says.

“This means that the slowdown we are witnessing is in fact partly created by the Chinese government, and does not come as an external shock.”

The probability of a hard landing in China is low, says Kerry Goh, head of Asia Investment Solutions Europe at Bank Julius Baer. “The Chinese government still has many fiscal and monetary weapons on its hands to re-stimulate its economy when the need arises,” he says.

Mr Goh feels in the long term, the structural growth of China needs to come down a notch or two and cannot grow at 8 to 12 per cent indefinitely. “The share of GDP growth contribution needs to change over time from investment-led to a more consumption based one,” he says.

As Chinese policymakers are good at handling challenges for its growth, East Capital’s Ms Sandkleft believes the current slowing down of the economy may be a positive trend.

“What we are witnessing now could be China rebalancing its economy from being very dependent on exports and fixed asset investments to become more consumption driven,” she says.

Investors have focused too much on macro trends and too little on corporate earnings growth and valuations, believes Gustav Rhenman, portfolio manager at East Capital. “There are exaggerated fears related to the banking sector, in particular the local government financing vehicle, the real estate sector and the leadership transition,” he says.

Chinese equities are very cheap and the medium and long-term outlook continues to look much better than in most parts of the world, he says.

“Investors should focus more on earnings per share growth than the last decimals of the GDP growth figure,” Mr Rhenman says, referring to East Capital’s estimated earnings per share growth of 8 to 10 per cent.

CURRENCY APPRECIATION

He feels not only do you get earnings growth, but you have gradual appreciation of these earnings if you are a dollar investor. “The renminbi remains undervalued and in the long term, China’s government is likely to allow it to continue to appreciate,” Mr Rhenman says.

Julius Baer’s Mr Goh, also a fan of the Chinese currency, says that for non-US dollar investors, the renminbi has been one of the most resilient emerging market currencies and one of the best performing developed market and emerging market currencies since from January last year to today.

“On top of this, it is fairly attractive to dollar clients from a positive yield carry point of view,” he says.

“China is fast becoming a crucial talking point and lead indicator in shaping our overall asset allocation decision,” adds Mr Goh. “Chinese demand growth and therefore, its global beneficiaries such as luxury companies or global commodities players, feature heavily in our investment discussions.”

Kristina Sandkleft, East Capital