Trade & Investment: Down or Up

Uncertainties regarding China and its actual GDP growth figure, policy-making abilities and other concerns have clouded global investment outlook. A panel of experts recently sat down and discussed views on what’s happening in the country now, and how to move forward

By Tsering Namgyal


The lack of clarity over the actual state of the China’s economy is casting a shadow over the already disappointing global economic outlook, economists say.

Under such a scenario, the decision by the US Federal Reserve Board not to raise interest rates was justified, opines Simon Cox, investment strategist for Asia Pacific at BNY Mellon.

“On a broad range of indicators, the US job market is weaker than it was in June 2004, when the Fed began its last tightening cycle. Inflation is weaker than it was in 2004, and monetary policy, if properly measured, is actually tighter than it was in June 2004,” Cox says at a recent AmCham talk, pointing out that the so-called “neutral” or “natural” interest rate was lower today than it was then.

And China continues to remain a source of uncertainty as the country’s GDP figures attract increasing skepticism. Even though the government claims that the GDP growth figure is seven percent, he says the actual figure could be between five to six percent.

“None of us can have a very good grasp about what is happening in China. The range of things that could be true is extraordinarily large.”

To drive home his point, Cox uses as a reference the alternative guide to China’s economic growth – the Li Keqiang Index, created by The Economist magazine in 2010.

Photo 23
(From left) Jessica Cutera, Simon Cox

The index is named after China’s current premier, Li Keqiang, who during his tenure as the party secretary of Liaoning province, used railway freight, electricity consumption and bank lending as a measure of the province’s economic growth.

“If you judge by the Li Keqiang Index, the growth is more like 5.4 percent rather than the official rate of seven percent,” he says. “This shows that either the relationship between China’s 10 trillion dollar economy and railway freight, electricity consumption and bank loans has changed fundamentally.”

Potential hard landing

Qian Wang, managing director for Asian macro research for Vanguard Investments, also underscores concerns about a hard landing in China, which some worry could trigger a worldwide recession.

However, Wang believes that perhaps the biggest concern is “the risk of policy missteps” by the Chinese authorities as shown during the stock market rout and the RMB depreciation over the summer.

Like Cox, she’s skeptical of the purported seven percent growth of the economy. “There is no doubt that China’s economy is slowing. We are expecting the second half GDP growth rate to come down to about six percent and for the full year, we will be lucky if we are able to achieve something close to 6.5 percent,” she says.

Yet, according to the executive, the slowdown in China is old news as she points out the fact that China’s GDP growth rate has nearly halved from about 14 percent before the global financial crisis.

“What is new is really the shaken investor confidence about the ability of the Chinese authority to maintain the subtle balance between the pace of the growth and the quality of the growth,” she argues.

Photo 24
Qian Wang

The concerns about a potential hard landing in China are primarily fueled by two factors: the slowdown in the financial services sector and the slump in the real estate sector.

Wang forecasts that the weakening stock market would probably shave off as much as 0.7 percent from the GDP in the second half of the year, considering the fact that the financial services sector contributed quite significantly to the first half growth figures.

In terms of the real estate sector, the fixed investment growth in housing has slowed down from nearly 40 percent from 2007 to about three percent now. This means that over the past decade or so, nearly 75 percent of the slowdown in GDP has been a direct consequence of the lower real estate investment. “Based on our research, real estate has a very long supply chain, and it has an impact on a lot of other industries,” Wang says.

On the whole, she points out that every 10 percent slowdown in the housing sector investment would lead to about two to two and a half percent reduction in the headline GDP growth.

What it means

Further complicating the economic picture in China is the fact that Chinese authorities are juggling multiple policy priorities.

In order to maintain social stability, the government must maintain a certain level of GDP growth in the near term. Yet the government must also continue with the work of rebalancing the economy to ensure long-term sustainability of China’s economy. In addition, the government also must lower the risks to the financial system.

“It is therefore not easy for the Chinese governments to try to achieve all these goals simultaneously. It takes a lot of skills for Chinese authorities to maneuver all uncertainties and risks and, in the end, achieve a soft-landing,” Wang says.

The recent policy uncertainties have made investors question the Chinese government’s ability to deliver on its promises of a soft-landing.

Worse still is those decisions have hurt the government’s credibility, at least in terms of pursuing its reformist agenda, according to BNY Mellon’s Cox. “The policy missteps have damaged the reputation for reforming constituency within China, and conservatives might use these mistakes as an example.”

While these uncertainties have given investors a taste of the extent to which policies could go wrong, they have also given an opportunity for Chinese authorities to learn from their mistakes.

“We think there will be continued slowdown but hopefully it will be a smooth transition engineered by policymakers. It’s good that Chinese policymakers are learning their lessons,” Wang says.

Yet she seems slightly pessimistic about the government’s ability to forestall a private sector slowdown.

“Slowdown in China is not just cyclical but there are structural and secular forces that are making China’s slowdown story a very protracted one,” she says. “Since we have accumulated so much overcapacity in the past, we have to absorb and adjust all that excess going forward.”

Photo 25
(From left) Qian Wang, Jessica Cutera, Simon Cox, Ernest Ng

Ernest Ng, chief investment officer of Hong Kong hedge fund Sumeru Capital, believes that perhaps in light of such a scenario, investors should strive for capital preservation. “This transition and reforms will be challenging, and I think we are in for a period of volatility,” he says.

Furthermore, due to the lack of homogeneity in terms of factors driving growth across the region, it is best to access these markets through a diversified strategy.

“Given the variation between individual countries, we recommend investors evaluate them separately and make single country allocations based on the most attractive opportunities,” says Jessica Cutrera, founder and managing director of wealth management firm EXS Capital.

This is especially true when evaluating the Asian investment climate. “This does vary with timing but it isn’t trying to time the market for the sake of market timing, but rather to focus on your entry point on sensible valuations and look to exit those markets when and if they become overvalued while paying attention to volatility,” she explains.

In a similar vein perhaps, what matters in the end is not the GDP growth but relative valuation and, by extension, investor expectation, according to Vanguard’s Wang.

And this is why she believes what investors should be asking is whether the markets have been more pessimistic than necessary, despite the weakening of the Chinese GDP, which she expects to slow down to five percent or even lower by 2020.


Tsering Namgyal has been a writer specializing in business and finance for roughly two decades. A graduate of the University of Iowa and University of Minnesota, his articles have appeared in Asia Asset Management Review, Fund Strategy, IPE Real Estate, South China Morning Post, amongst others.

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