Understanding China’s Growth Story
Seeing the reality beyond investor pessimism.
BY Jennifer Hughey | August 8, 2018
With the growing relationship between Donald Trump and Xi Jinping and solid out-performance by many Chinese companies, 2017 was a landmark year for China. So will it continue as the world’s best consumer story? Or will the momentum fade?
According to Andy Rothman, investment strategist with Matthews Asia, comparing the headlines driving short-term sentiment toward China and the long-term fundamental drivers of the country’s secular economic growth only reinforces the importance of understanding the risks and potential rewards before taking the leap.
China accounts for anywhere from one-quarter to one-third of global economic growth annually, Rothman says. China has a larger share of global growth than the U.S., Europe, and Japan combined.
Yet investors remain pessimistic, even though 2017 was the sixth consecutive year when the tertiary part of GDP, the consumer and services part, was bigger than manufacturing and construction.
THE RISE OF ENTREPRENEURS
China is now a consumer-driven economy, he says, and most of the growth has been entrepreneurial over the last two decades. Eighty-five percent of urban employment in China is with small privately owned companies, and all of the net new job creation is in these areas.
“Before long, people will realize the Chinese economy is no longer export oriented,” Rothman notes. Ten years ago, about 9% of China’s GDP was net exports. Currently, it’s only 2%, and less than 10% of the total domestic stock market, or A-shares, is export-oriented companies.
Rothman does not believe there is a property bubble. A key reason is that Chinese buyers typically put down at least 30% cash, and there are few subprime mortgages. While prices in a few cities have skyrocketed, in the smaller cities where two-thirds of the urban population lives and two-thirds of new home sales take place, house prices have risen by only 15% over the last seven years. This, during a period when nominal income growth was 10% every year.
The Chinese government has also adopted policies that support stronger earnings growth, including reducing excess industrial capacity. This has resulted in the loss of well over one million jobs in both steel and coal over the last three years. Stricter enforcement of environmental rules has reduced unfair competition, leaving behind compliant firms with better margins.
The strong consumer story is sustainable in Rothman’s view because it is driven by rapid income growth, low household debt, family savings, and an optimistic view of the future.