Don't obsess over China's GDP growth rate

GDP growth may be the least important statistic in China. After all, we don’t make investment decisions based on GDP growth rates. The most important stats in China concern employment, income, inflation and consumer spending.  In my view, we have far better visibility into these topics now than we had in the past because of the growing role of privately owned Chinese firms, the significant participation by foreign-owned firms in the domestic economy, and because foreigners are now able to conduct independent surveys of business conditions.

China’s old economy is weak, but the consumer story remains strong.

China’s old economy was weak last year, and that will continue this year, especially in heavy industries, such as steel and cement. China has passed its peak in the growth of construction of infrastructure and new homes. But manufacturing has not collapsed, with a private survey revealing that wages at privately owned factories were up 4% to 5% in 1Q16 (compared to 6% to 7% a year earlier), reflecting a fairly tight labour market. Crude oil imports by volume rose 13% (after rising 9% in 2015) and the volume of copper imports was up 33%.

I expect the consumer story to remain strong for several reasons. Income, while decelerating along with the rest of the economy, should grow by more than 6% in real terms this year. This follows a decade of more than 130% real income growth, compared to about 11% growth in real per capita disposable personal income in the U.S. over the same period. I expect another year of moderate consumer price inflation, at about 2%. Household debt is very low, and the savings rate very high. All of that contributed to an 11% rise in real retail sales last year.

We can check that official retail sales statistic against numbers from private sources. Apple, for example, reported that during its 1Q16 period its greater China revenue rose 14% (compared to a 4% decline in the U.S.) while Nike said its shoe sales were up 30% during the quarter ending in November. The Japanese government told us that last year, Chinese visitor arrivals rose 107%, after an 83% increase in 2014, and that Chinese spent more than twice as much as the average visitor. In January, Ford’s vehicle sales in China rose 36% YoY, while Cadillac sales increased 16%, the sixth consecutive month of double-digit sales growth, according to GM. Mercedes reports that its unit sales in China rose more than 50% in January.

GDP Growth Slower, But No Signs of Collapse

As I’ve been saying for some time, it is inevitable that most Chinese economic statistics will grow at gradually slower year-over-year rates for many years to come. This is due in part to structural changes, including a shrinking workforce, and because after three decades of 10% growth, the base has become too big to sustain double-digit expansion.

Too few investors (as well as too few pundits and journalists) recognize that 2015 was the fourth consecutive year in which the manufacturing and construction part of the economy was smaller than the consumption and services part. Consumption accounted for about two-thirds of GDP growth, illustrating that the economy has rebalanced away from a dependence on exports, heavy industry and investment, and has, in my view, become the world’s best consumption story. This mitigates weakness in manufacturing and construction, and, if this rebalancing continues, it should mean that macro deceleration will be gradual.

As of April 30, 2016, accounts managed by Matthews Asia did not hold positions in General Motors, Mercedes, Ford Motor Companies, Nike, Inc. and Apple, Inc.

Visit the Matthews Asia Coffee House at FundForum International to meet China Expert Andy Rothman for answers to your China questions. Andy will be available on Monday, 6th June 10.30am-12.30pm. For other times please speak to a Matthews Asia representative at the Coffee House.

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The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writers’ current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles.  Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation.  It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein.   The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC (“Matthews Asia”) does not accept any liability for losses either direct or consequential caused by the use of this information.