Why We’re Still Bullish on the Chinese Economy
Recent news from China about slowing growth and exports, the depreciation of the renminbi, and volatility in the stock market, has painted a pretty gloomy picture.
But from my vantage point here in China, I take a more positive view toward the country’s economic situation. The progress that private companies are making, and the success of many firms at selling to China’s rapidly rising middle class, are just two of the reasons why I remain positive toward China’s economic prospects.
In this post I focus on why I continue to feel broadly positive about the economy, and what are the four trends that business leaders should pay close attention to. In a follow-up post, I will cover some of the risks that could throw the economy off course, if not handled well.
Why We Remain Positive
China’s actual and potential growth path has slowed considerably, but it is still a US$10 trillion economy, and it is growing faster than most of the world’s top 20 economies. This growth is mainly driven by consumer spending and is spending that increasingly goes toward services and not products.
Chinese consumers still feel confident and are spending to reflect that. Chinese consumers feel secure in their jobs (with over 7 million new urban jobs in China year-to-date) and have rising incomes (up 8% over the last year). Much of China’s wealth is concentrated in the younger generation who see much less reason to save than their parents did, and for whom paying for a service that saves them valuable time is a trade-off worth making.
Not only are they willing to spend, but they also don’t really see good options for investing. The stock market is a lottery, property investments are generally not rising in value, and banks offer negligible interest rates. Spending seems a pretty good alternative to saving. These consumers have over US$9 trillion in financial savings today, according to JP Morgan. The potential for them to spend more in the years ahead is already in place.
While China’s manufacturing sector has grabbed our attention, China’s service sector has quietly been powering ahead with the Purchasing Managers’ Index at 54-55 (anything over 50 indicates an expansion in purchase of services). This year will likely be the first on record in which services represents more than 50% of GDP (up from 46% only 2 years ago).
This is not just about Internet enabled services, such as e-retail and taxis. Very traditional service sectors are growing fast. Take cinemas for example – box office revenues in the first half of 2015 rose almost 50%, the turnover of second hand car dealers rose over 30%, rail travel was up by over 10%.
Services that were almost non-existent in the past such as elderly care and vocational retraining are becoming job creation engines. Foreign investors should pay close attention to the opportunities in services as the majority are fully open to international investors.
On more specific issues:
- Currency – we had similar scale adjustments in the past, and certainly the trade weighted exchange rate is still stronger than a year ago.
- Equity – the market is still up 30% year-on-year.
- Capital outflows from China have been much larger as a % of GDP in the past.