China is not immune to the woes plaguing the global economy, but slowing growth could be good for its overheating economy according to Francis Cheung, head of China and Hong Kong strategy at CLSA.
As the government tightens its fiscal policies and exports continue to fall, the bearish mood in China is even casting a shadow over once-bullish equity markets. But Cheung is nevertheless upbeat. “Sometimes [tightening policy] is not good for markets, but actually good for the economy,” he said yesterday, speaking at the annual CLSA Investor Forum in Hong Kong. “It was really a bad thing for China to grow by 14% in 2007, and the new consensus within China is that slow growth is good.”
He added that “a hard landing is no longer an issue”, citing his belief that inflation has peaked and with fiscal tightening achieved, China will grow between 8% and 9% during the next five years.
There is a school of thought that consumption rather than investment will fuel future GDP growth in China, given that retail sales of consumer goods remained stable even when exports collapsed after the financial crisis in 2008. However, Cheung says investment will be the key driver to China’s growth, with the expected annual migration of around 10 million people into the cities.
Statistics presented by Andy Rothman, China macro strategist at CLSA, at a subsequent presentation yesterday afternoon support Cheung’s hypothesis. About 53% of China’s GDP growth in the first half of this year was driven by investments and the remaining 47% by consumption. Net exports had no contribution.
Cheung says concerns regarding China’s estimated Rmb10.7 trillion ($1.7 trillion) local government debt are misplaced. “If you look at what is on the bank reserve in the central bank, there is Rmb16 trillion there,” Cheung said, adding that at the end of the day, China has a very strong balance sheet.
Cheung is more worried about the outlook for earnings than for China’s overall economy. Although the MSCI China index recorded earnings growth of 23.4% year-on-year in the first half of the year, revenue was mainly driven by price increases rather than higher sales numbers.