Inscrutability behind the Great Wall of China

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4 mins. to read
Inscrutability behind the Great Wall of China

One should always listen to stock markets; they can tell you things. But in the case of Chinese stock markets it is different.

If one thing remains the same in this changing world, it appears to be that things Chinese remain inscrutable to Western eyes. The Chinese stock market collapses, but the empirical evidence for the state of the economy seems at odds with China’s share price rout – or at least qualifies the bearishness of it.

I do spend a little time trying to keep inadequately abreast of what goes on in the land beyond the Great Wall, but it is not easy! As far as I can judge, the world’s economists, who are paid to know much more about China than the rest of us, do not seem to think that China’s economy has changed dramatically. The consensus forecast for GDP growth for 2015 seems to be in the region of 7% which is not wildly different from the 7.3% GDP growth that China put on in 2014. Turning to the latest poll of economic forecasts this January, I note that the forecast expectation for this year is between 6.8% and 7.0% GDP growth. Goldman Sachs estimates GDP for China at 6.9% for 2015 and 6.4% for this year.

That seems to be consistent with the idea that China’s economic growth, as measured in its GDP figures, will continue to decline, but in a gradual sort of way, as it has done over the last few years from the peak of 10% and not in a puff of smoke like the late fictional Dr. Fu Man Chu. More under foot evidence of healthy economic normality seems to be reflected in the latest China trade statistics for December.

I realise that not everyone has the compulsion to read such gripping material rather than watch a good football match or drama on the telly – but someone has to! Should you have spent your time perusing China’s trade figures (rather watch the Arsenal v Liverpool game or War and Peace on the television) you will have discovered that they are not that bad.

First, although China’s exports did decline in December, it was only by 1.4% – i.e. nothing to justify the catastrophic scale of the most recent collapse in Chinese share prices. As our friend Donald Trump might have said, “What the hell is going on?” That was a great improvement on the minus 6% figure for November and much better than the minus 8% forecast. It appears that China out-exported both Taiwan and South Korea in December. This is admittedly only one month’s figures, and they are inevitably subject to later revision, but they do bridle the wilder bearish apprehensions about the state of China’s economy. If the fears about China lie in its ability to export, the December statistics are inconveniently robust.

Moreover, the Yuan has been devalued by 5% against Uncle Sam’s dollar since last August, and that should help China’s exports further – particularly since the Chinese have been importing low cost oil and copper. We know that because imports of oil into China were at a record high during December, whilst copper imports were reported as being at their second highest level ever.

In any event, China seems to have experienced a $60 billion trade surplus in December, which seems a result somewhat different from those wholly negative prognostications that seem to swirl around like a Beijing ‘pea soup’ fog.

Although there was a ritual song and dance about the devaluation of China’s currency, it was totally consistent with what one might have expected from a market driven outcome. The story of currency exchange rates is largely the story of a strengthening US dollar as a result of rising (real and perceived) US interest rates.

It is true that China has some evident problems in its real economy, including overcapacity in some sectors of industrial activity, too much property investment, and a subsequent misallocation of investment as well as its traditional corruption and bureaucracy issues.  None of these things are new developments but are instead established and well understood features of China’s political economy. The argument seems to centre on what solutions are most effective and most probable. Chairman Xi is reported to believe in the orthodoxy of old, centralised government action to sort things out, whilst ageing Chinese academic economists seem to believe in more Western oriented, market based solutions.

It seems that Chinese share ownership is largely the preserve of individual investors rather than institutions. Private-investor dominated markets are thus, on the face of it, likely to be subject to greater bouts of greed and fear than mature, Western share markets. In mature stock markets, institutions act like brakes on falling markets. If they go down by an unreasonable amount, some big investing institutions are likely to step in from time to time, to add stock at lower prices in order to average down the book cost of an existing holding with a falling share price. Investment banks employ specialist analysts to facilitate ‘liquidity’ activity, although many fund managers, in my experience, often do it on gut feeling. (A really good broker is one who can get an institutional client in at the top and out at the bottom of a share.) In short, large, mature institutional markets have checks and balances built in.

Moreover, new investors have a dangerously poor understanding of the volatility of equities. Some begin on the assumption that they can only go up – and on that basis can act rather rashly.

In short, I think that we should not put too much emphasis on the Chinese equity market being a reliable or accurate predictor of economic realities at all times. As one of the market’s uncertainties, I think China bearishness is overdone.

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