This site is part of the Informa Connect Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 3099067.

Wealth & Investment Management
search
Asia

It's time to stop talking about a Chinese hard landing

Posted by on 05 June 2016
Share this article

There is still no shortage of media headlines proclaiming the demise of China. Investors and market watchers worldwide remain concerned about a variety of economic developments in China and what they may mean for regional and global growth. But I believe it’s time to put talk of China’s collapse to rest. A modest credit stimulus and a housing market rebound led to a pick-up in investment and industrial activity during the first quarter of the year, and while that should end talk of a hard landing, the gradual deceleration of China’s economic growth will continue. Growth is driven increasingly by consumption and services as re-balancing proceeds, and that part of the economy—the largest part—continues to offer opportunities for investors.

A look at China's recent macro data confirms my expectations: the consumer remains healthy; industry remains weak but consumer-oriented manufacturing is fine; the first quarter's modest credit stimulus stabilised GDP growth and now that the stimulus is being withdrawn, GDP growth will, within a few quarters, resume its gradual deceleration. So while the growth rates of most parts of the economy are likely to continue to decelerate gradually, keep in mind that 2015’s “slow” pace of 6.9% growth, on a base that is about 300% bigger than it was a decade ago (when GDP growth was 10%) means that the incremental expansion in China’s economy in 2015 was about 60% bigger than it was back in the day.

No Sign of Ghost Cities

I believe the housing market is a reflection of consumer health and optimism. Residential sales beat all expectations in the first four months of this year, reflecting strong consumer sentiment and spending power (about 90% of new home sales are to owner-occupiers). While this performance was stimulated in part by last year's cut of the minimum cash down-payment to (a still prudent) 20% of the purchase price (from 30%) and lower mortgage interest rates (the benchmark rate is 4.9% vs. 5.9% a year ago and 6.55% two years ago), the 38.8% YoY growth in residential sales volume for the first four months of the year is a clear signal of consumer confidence. That 38.8% growth compares to 35.6% in the first three months of the year and to a 5% decline during the first four months of 2015.

We don't yet have a breakout by tier of city for April, but in 1Q16, sales rose 35% in the smaller tier 3 cities (where 64% of new home sales by volume take place), compared to a 39% increase in tier 2 and 18% rise in tier 1. The consumer story appears vibrant in the smaller cities which are home to 62% of China's urban population. New home starts rose 18% YoY during the first four months, up from 14.8% during the first quarter and compared to a 19.6% decline during the first four months of last year.

Residential investment rose 6.4% YoY for the first four months, up from 4.6% in 1Q16 and compared to 3.7% a year ago. While inventory levels remain high, especially in many smaller cities, those levels have begun to decline as sales accelerated. We are also seeing signs that developers have become more confident: land area purchased increased in March and April, following double-digit YoY declines for 16 consecutive months.

Re-balancing is necessary, but means growth will slow

We need to accept and understand, however, that the necessary restructuring and re-balancing of China’s economy, along with changes in demographics and the law of large numbers (two decades of 10% growth), does mean that almost every aspect of the economy will continue to grow at a gradually slower year-on-year pace for the foreseeable future. The strong consumer story can mitigate the impact of the slowdown in manufacturing and investment, but it can’t drive growth back to an 8% pace. Nevertheless it’s time to stop talking about a Chinese hard landing.

Visit the Matthews Asia Coffee House at FundForum 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.

For Institutional/ Professional Investor Use Only.
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.

Share this article

Sign up for Wealth & Investment Management email updates

keyboard_arrow_down