The view from Matthew Dobbs, fund manager, Asian Equities
“We are in the middle of the Chunyun, or Spring Festival when the people of China take to trains, planes and automobiles. An estimated total of 3 billion journeys are likely over a four week period as families come together to mark the opening of the Year of the Rooster. In general, they are likely to conclude round the well stocked family table that, as has been the case for the last thirty years or so, they are a little better off and a little more secure than they were a year ago. In this lies the legitimacy of the Communist Party of China.
Their leaders are, perhaps, less sure. The maximum point of stress early last year has been negotiated, but at the cost of further strong growth in credit (around twice that of GDP) primarily directed towards more infrastructure spend. This has helped spark a recovery in heavy industry, producer prices and aggregate corporate profits, but at the cost of continued pressure on the capital account and rising levels of debt. Potentially risky structural reform has not been high on the agenda.
Longer-term, the issue of rising debt to GDP and burgeoning non-performing assets in the system will have to be addressed, along with a recognition that the growth potential of China is materially lower than the 6-7% cited by Beijing. Clearly there are risks as to the timing of that realisation, and a potentially hostile geo-political and trade environment does not help (although US exports are less than 5% of China’s GDP). However, amid a stronger tone to global growth, China is likely to muddle through for the foreseeable future amid a combination of a gradually depreciating currency, capital controls, and the important cushions of US$3tn of foreign currency reserves, a current account surplus and the fact that debt is overwhelmingly domestically held.
This may not sound an overly positive assessment, but given the widespread, and consensus, pessimism over China, it should not prevent regional markets making positive progress over 2017 given steady global expansion, a return to earnings growth after five years of absence and still depressed valuations.”
The property view from Hugo Machin, co-head of Global Real Estate Securities
“Chinese cities continue to grow at a rapid rate as the country industrialises and GDP and retail sales grow quickly.
The scale of these Chinese Cities is equal to some of the largest metros in the world such as New York and London, but they have stronger growth prospects. This is why they rank so highly in our Schroders’ Global Cities Index. China’s mega-cities dominated the latest index, published in December, taking four of the top five places. China’s capital city Beijing jumped from fourth place to first, whilst Shanghai, China’s most populous city with 22 million residents, fell from first place to second. Shenzhen, which links Hong Kong to China’s mainland jumped from sixth place to third, whilst Tianjin, China’s third largest city fell from third to fourth place.
We favourably view the increasing economic diversity of select Chinese Cities, such as Shenzhen, which is not just a manufacturing story but increasingly about higher value services. The city has started to establish itself as a key location for technology companies. It is developing into a value-chain cluster, championed by some key corporates. Nanshan Hi-Tech Park, which is home to companies like Huawei, Tencent and ZTE, shows the commitment to the new economy.
We find the combination of absolute size coupled with strong economic growth a compelling story. We think the Chinese mega-cities will become an increasingly important place for real estate investment in the coming years and see the rapid growth and urbanisation of the top-ranked Chinese global cities as a growing trend.”
The view from Michael Zorko, fund manager, Business Cycle
“Since the dark days of 2015, China’s economy has new found momentum driven by government stimulus. Markets have reacted to this increased activity, with industrials and commodity stocks responding particularly positively. During our recent trip to China the businesses we visited confirmed the environment was strong and improving. The twice-a-decade party Congress is approaching in November and with economic stability a stated priority of government, continuing momentum seems a sensible assumption. Given this focus on stability, Trump’s surprise election could not have come at a worse time for China. Despite being portrayed as juvenile and inexperienced by the Chinese press, he is being taken extremely seriously by party leaders and avoiding a trade war this year is a particular priority in our view.
Returning to the matters raised by the businesses we visited, a common theme was how significantly President Xi’s popular corruption crackdown had impacted decision making. Whilst the direct impact on the luxury goods/beverages/leisure sectors is clear, the impact of wider investment seems less thoroughly appreciated by investors. Having seen many of their colleagues arrested and assets seized, officials in both the public and private sectors have been reluctant to award any new contracts or even renew existing ones, for fear of being accused of corruption. Clearly this behaviour hurts almost all sectors of the economy when decision making stops but as it washes-out offers an interesting recovery tailwind. Quantifying the impact is difficult given its inherent opacity but could garner more investor attention, particularly when the market contemplates the potential duration of the current phase of government stimulus and a new regime of tightening monetary policy.”
The view from Craig Botham, Emerging Market economist
“The final quarter of 2016 capped the year with a slight acceleration in growth, despite apparent policy tightening. Though slower than 2015, growth of 6.8% in the final quarter saw 2016 growth come in at 6.7%, well within the tolerance of the official target. Compared to our expectations before the year began, when policy discussions were full of talk about reducing spare capacity and containing excesses, it is fair to say this has come as a surprise.
Looking ahead, a slowdown in 2017 seems likely, but its scope will be modest. Credit growth in China has only recently slowed, and even then only marginally. It will be at least another quarter before this feeds through to activity. We are sceptical that real cuts to spare capacity industries will be undertaken ahead of the Party congress towards the end of 2017, given the importance of the event to President Xi. That we expect a slowdown at all reflects recent policymaker statements on the need for stability over growth, but we have heard these noises before and seen only the slightest of course corrections.
We currently assume little change in policy direction from China this year, with respect to growth or the currency. But this assumes that the Chinese government is able to write the script unhindered. President Trump may end up jostling Xi’s otherwise steady hand.”