Andy Rothman: “The Chinese Debt Problem is Concentrated to Some Sectors and Standardization Will Not Be Traumatic”
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Many experts predict a dramatic story for China, claiming that an economic crisis or a hard landing of the Asian giant is just around the corner. But the reality is less dramatic: Although China faces many challenges, it is more likely to continue to account for about one-third of global growth than to be at the center of a collapse.
Speaking at Matthews Asia’s 2016 Investment Forum in San Francisco, Andy Rothman, investment strategist at the firm, explained that a misunderstanding of how much the economy has changed in recent years is what drives the extreme pessimism for China’s prospects.
“China’s growth deceleration is indeed a fact, but, How possible is a ‘hard landing’?” he queried. “From the media’s point of view, the story of China’s collapse is very appealing, and given the misunderstanding of its economy, it’s an argument that easily gains adherents,” he said.
“The average citizen in developed economies imagines China as an economy which is fully controlled by the state, with a very communist background, ghost towns, “zombie” companies, and a huge weight of exports and investment in its GDP. But the reality of China’s economy is more like this:
- 80% of employment in China is in private hands.
- All employment growth is generated by SMEs
- China has become a market for entrepreneurs
- It is headed for its fifth consecutive year in which services and consumption account for a larger part of its economy than manufactoring and construction.”
The rebalancing of the Chinese economy from investment to consumption implies lower growth, said the expert, “but we must not forget that last year China was responsible for 35% of the global economy’s growth and that, ultimately, what happens in China has a huge impact on the global economy and in most of the companies in which we invest, both inside and outside China. Therefore, it is important for investors to understand what is really happening there,” Rothman pointed out.
As an example of this transformation, the strategist mentioned the prevalence of private companies, and not of state-run enterprises, as is widely believed. Also, the services and consumption sectors already exceed manufacturing and construction.
Mistrust indata
It is true that when dealing with the macroeconomic data published by China, there is certain mistrust, which is very hard to overcome. For the Matthews Asia fund manager, skepticism is quite clear. “There are reports that growth in electricity consumption is much lower than the GDP growth data. And that is so. That does happen, but the same is true in the United States. Growth comes from companies and industry sectors which are much less electricity intensive, such as Alibaba,” he explained.
“Another thing which is also frequently mentioned is the drop in imports of raw materials, but that data is always reported in dollars, not volume. And the reality is that the price of raw materials has plummeted in recent years, so when looking at imports of raw materials in terms of volume (tonnes), the slowdown is far less dramatic,” he said.
Debt
“The debt problem is serious, but the risk of a hard landing or banking crisis is, in my view, low. The key reason for that is that the potential bad debts are corporate, not household debts, and were made at the direction of the state—by state-controlled banks to state-owned enterprises,” Rothman said. This provides the state with the ability to manage the timing and pace of recognition of nonperforming loans. It is also important to note, he points out, that the majority of potential bad debts are to state-owned firms, while the privately owned companies that employ the majority of the workforce and account for the majority of economic growth have been deleveraging. Additional positive factors are that China’s banking system is very liquid, and that the process of dealing with bad debts has begun.
A massive devaluation of the Renminbiis not expected
Last year, the Renminbi depreciated by about 6% against the dollar, while so far this year, it’s down by about 4%. “The Chinese currency is unlikely to depreciate, or appreciate by more than 5% per annum, and the direction will most probably vary depending on the strength of the dollar against the other world currencies. The reality is that China remains a competitive exporter, even though wages have grown on average 15% annually in recent years and the Renminbi has appreciated over 40% against the dollar from 2005 to 2015” Rothman, concluded.
