19th July 2013
The focus on short term macro-economic data from China is masking the huge transition underway in the world’s second largest economy argues Virginie Maisonneuve, head of global and international equities at Schroders.
She says: “While some commentators have been quick to sound the alarm bells at the prospect of China’s growth slowing, it is critical to remember that China is an economy in transition. Having grown at an extraordinary rate to propel itself from the 13th largest global economy in 1980 to the second largest today, it is now shifting to its next phase of development. The focus on short-term macro data is a diversion from these important changes.”
Maisonneuve notes that the need to steer China’s growth path away from the dominance of heavy investment and towards consumption has been discussed for over a decade now but that it has not been easy to implement with consumption in China represents only 40% of GDP versus over 70% for the USA and over 55% for India.
“Achieving the aim of making consumption a leading engine of growth was interrupted by the impact of the emergency measures implemented in 2009 to avert a sharp slowdown in the midst of the crisis. Some of those measures, as has been widely discussed, have led to a sharp liquidity increase and misallocation of capital. This has fed the emergence, among other things, of the shadow banking sector,” she adds.
“President Xi Jinping and Premier Li Keqiang, the new leading team, are very focused on setting up a strong base for China to do well in its new phase of development as it matures over the next decade. In particular, they are targeting structural inefficiencies by focusing on key reforms. This will reach areas such as financial reform, shadow banking, improved allocation of capital (to small and medium-sized companies, for example), the state owned enterprise sector and environmental issues. This is a Herculean task but is important for China’s transition to its new phase.
“As is the case in any important shift, some of these changes may not be welcomed by all parties and might take some time to implement, but ultimately they are crucial to achieving higher quality growth that is better adapted to China’s future. The success of these structural shifts is key and in our view more important than short-term macro data. Ideally by the party congress meeting in the autumn, some milestone achievements will have been made and the new team will be able to disclose more details on their plan to support growth.”
In terms of the global economy, she notes that many fear a deceleration of Chinese growth will be negative for the global economy but Maisonneuve is not so sure.
She says: “While this may appear a logical conclusion, given China’s size, its demographic profile and its slowly maturing path, this may not be the case. Indeed, a gentle slowdown from the stratospheric boom years of 10-12% GDP growth towards a 7-8% level and possibly 6% by 2017 may not be all that bad for the global economy. China’s share of the world economy is increasing (see chart below) and even with slower growth is still well above global economic growth. In short, China may well remain a support engine for the global economy even at lower growth rates.”
She says that the improving global economy may mean the wolrd is actually well placed to adapt to China’s transition.
She says: “Timing is also important: with the global economy stabilising and the US recovery gaining traction, the global economy is now well-placed to adapt to China’s transition. Japan’s decisive attempts to re-emerge and make structural adjustments will also help support growth globally. Interestingly, because of the rivalry between the two countries, it might also indirectly encourage China in putting in place some of the necessary reforms.
“What the world does not want is a sudden shock in the Chinese economy driven by inefficiencies that have been left unchecked. The focus on short-term numbers should be put aside and attention turned instead to the important changes being made.”