In January, China reported a GDP growth rate of 6.1% for 2019 – it’s lowest since 1990 and a drop from 6.8% in 2018 – setting off alarm bells around the world. The Coronavirus outbreak has heightened the angst further.
However, the media’s fixation on decelerating Chinese growth fails to take a few important factors into account, says John Haynes, Chairman of Investec’s Global Investment Strategy Group and Head of Research for Investec Wealth & Investment UK.
The myth of China's economic slowdown
“China’s slowdown is a cause for global concern”
“China has reached a size where decelerating growth, measured on a percentage basis, is inevitable, but it is important to maintain a sense of proportion in absolute terms. Even at a [GDP] growth rate of around 6%, China is adding the equivalent [GDP] of a Switzerland every year,” explains Haynes.
While Investec believes that China's percentage annual growth rate is likely to continue to decelerate, consumption among its 1.4 billion-strong population will underpin its status as a powerhouse for both local and global growth.
China has successfully transitioned from an industrial and trade-driven economic model to a consumer-driven one, with consumption now making up around 70% of the incremental growth China delivers annually, says Haynes.
Indeed, according to McKinsey’s China Consumer Report 2020, China’s Consumer Confidence Index has hit a ten-year high this year. The explosive growth of China’s emerging middle class is set to continue with McKinsey predicting that urban household income will at least double by 2022.
“A consumer-driven growth model is something that is sustained by employment and savings and all the things that are domestically controllable. At the moment, we believe that China is on a course that is set to continue to deliver further consumer growth going forward, so we believe China will be a source of stability, not instability, for the world economy going forward.”
Investec’s Global Investment View for Q1 2020 concurs: “China remains in control of its own destiny and, as the nexus of the wider emerging market growth story and an important trading partner for Europe too, absent an all-out trade war, will continue to grow solidly.”
Even at a [GDP] growth rate of around 6%, China is adding the equivalent [GDP] of a Switzerland every year.
“China’s debt problem is insurmountable”
China’s debt to GDP ratio is approaching 310% – the highest of all the developing markets – due to a borrowing binge by corporates, households and Gen Zs.
“People are worried that an emerging market that generally has lower debt levels is unable to afford both the quantum and the increase in debt. We are much less concerned than we perceive the average investors to be, and the reason is very simple: it's because China's debt problem is its own problem, it isn't anybody else's. In other words, China's debt is funded by Chinese consumers and by Chinese savers.
China’s debt bubble can only burst if Chinese people lose faith in their own economic growth model, something that Haynes says is highly unlikely.
“Debt becomes a problem when someone has lent someone money that they then want returned and the person who has borrowed the money cannot pay it back. In this case, the people who may demand repayment of their debt are Chinese and therefore the Chinese themselves need to lose faith in their own economic equation in order for China's debt problem to become a real problem.”
Watch the Inside Out of the Ordinary film series
“The Coronavirus is going to have an even bigger economic impact than SARS”
“The Coronavirus outbreak originating in the Peoples Republic of China is on our radar as a potential disruptor of the otherwise optimistic outlook,” says Haynes. “Our judgement is currently that the virus will be seen to be brought under control over the next month.”
If this is the case, he says, the undoubted hit to global growth, directly through China and indirectly through constrained global supply chains, will be modest and rapidly recovered.
“This is a rapidly evolving situation however, and because it has very negative “skew” (the costs of being wrong are much higher than the benefits of being right), it is one that we take very seriously. We will be continually testing our assumptions against the data as it is released.”
The US-China relationship in 2020
“China wants to disrupt the US elections”
For the US, it’s imperative that trade friction cools off in the run-up to the November elections and that positive gains are made, as evidenced by the phase 1 trade deal signed at the start of the year.
“Donald Trump would like to move into the election period having some victory under his belt that suggests that he has won a material advance for the American people and the trading position of the US.”
Despite the US seemingly dominating trade negotiations, China has a lot more control than one would imagine, says Haynes.
While it is in China’s power to influence the US elections, they will most likely maintain a civil relationship with the US ahead of the elections, says Haynes, as “they do not want to be seen to rock the political boat or to interfere in the course of US politics” for fear of reprisals post-election.
“What disturbs the Chinese most is volatility. [Post-election] they would like to have a set of rules that they understand that they can then organise their policy both domestically and internationally around. So, China, like the rest of the world, would like stability.”
“Hong Kong will derail China”
Much has been written about the possibility of exacerbating trade tensions if China provokes international condemnation by heavy-handed intervention in Hong Kong.
While the issue of Hong Kong is unlikely to be resolved soon, Haynes believes it’s in China’s best interest to resolve the situation peacefully.
This view is backed up by Investec’s latest Global Investment View: “China has a lot to gain by demonstrating patience and a lot to lose by interfering [in Hong Kong]. We expect that locals will be left to sort out a local problem and that protesters will lose momentum with time, under pressure from those locals suffering economic harm as a result of the current disturbances.”
As the world’s second largest economy, China's position in the global political power balance is only going to become more critical. “China is beginning to demand a voice on the world stage which is far greater than it has had in the past. That will be something that we as investors will have to deal with because China's voice will be less polite than it has been in the past,” says Haynes.
“The balance that we are now seeing in terms of the US and China renegotiating their relationship is just a function of China's rise from relative insignificance to a very important player on the world stage.”