What You Need to Know about the Chinese Economy

China stock market abstract

If you worry about the Chinese economy, I don’t blame you.

In early 2015, the Chinese economy wavered as GDP growth fell to levels not seen in a quarter century. A subsequent stock market crash saw share prices plummet.

It seemed to everyone that China was on the brink of economic collapse.

But the collapse never came.

In today’s article, I’ll show you why I think that is, and what it means for your investments…

What the mainstream doesn’t understand about China

Here’s a start.

The stock market is not the Chinese economy. Nor do GDP figures reflect the transition happening right now.

A Chinese stock market crash causing a wider economic collapse was always unlikely. That’s because less than 7% of the population actually owns stocks.

Most Chinese have their wealth tied up in property and bank deposits, according to a Fortune.com report.

Nor does the stock market provide capital to China’s business sector. Equity raisings account for less than 5% of total corporate fund raising.

Bank loans and retained earnings, remain by far the biggest sources of investment funds, says Arthur R. Kroeber, a Senior Fellow at the Brookings-Tsinghua Center.

So where is the Chinese economy?

Most analysts openly question the official GDP figures.

Some analysts use the Li Keqiang index, named after the Chinese Premier, which measures electricity consumption, railway cargo volumes, and bank lending. That’s to try and gauge a more realistic view of activity levels within the Chinese economy.

Others eschew the Chinese statistics altogether, tracking instead South Korean exports to measure the health of Chinese consumer and heavy industries.

South Korea ships a fourth of its exports to China.

Let’s bring up the chart.

Source: tradingeconomics.comClick to enlarge

You can see the biggest dip was actually in February 2015. The downtrend we heard so much about in December last year was nowhere near as bad.

It’s a chart to watch going forward.

Having said that, exports from South Korea are mixed, including heavy industry products.

That’s the ‘old’ Chinese economy, which is now in decline.

According to Stephen Roach, a China expert and former Asia Chairman for Morgan Stanley, the GDP figures the mainstream quote largely measure this old economy of industrial exports, factory assembly and processing.

He points to the new emergent economy, which is services and consumer led. He cites an IMF report that says domestic consumption is now contributing more to overall GDP growth in China than investment for the first time in the modern era.

Roach argues that if the IMF analysis is right, the new economy is growing more rapidly than the old economy.

There’s compelling evidence that this is the case.

Employment data shows strong urban jobs growth, painting a more positive picture.

Services in China have generated about 30% more jobs each year.

The shift to labour-intensive services is how jobs growth is being achieved in a slowing economy.

Chinese official statistics put the annual job creation in the past three years between 12–13 million each year.

A Business Insider report backs this up, showing China’s services sector has been growing at more than 50% of GDP, consistently delivering more than 10% growth.

This is important.

The headline numbers that the mainstream media traditionally focus on is industrial and manufacturing output. However, they neglect the service sector because it is more fragmented and harder to quantify the data.

The best indicator to watch is the Chinese consumer

The China Daily reports Chinese consumers spent $183 billion abroad last year.

Government figures show that more than 120 million Chinese tourists went overseas last year. Their spending comprised at least 12% of global consumption.

Last year Apple sales to China surged 84%. In its annual securities filing for the fiscal year ended 26 September, Apple said it generated operating income of $23 billion in greater China — more than double its profit of $11.04 billion in the year prior.

Ditto for Nike sales to China; 2015 was another record breaking year.

Source: Statista.comClick to enlarge

If the figures from the Beijing based Fortune Character Group are to be believed, Chinese consumers bought up nearly half of the world’s luxury goods last year.

What can we take from all this? Very few people really understand what’s going on in China.

What we can infer is that a total collapse, on the scale of 2008, seems unlikely. Slowdown, yes; total chaos, no.

This is consistent with what Cycles, Trends and Forecasts editor Phil Anderson forecast for several years now.

In fact, he wrote a special report on why China would not collapse as many have repeatedly predicted over the last five years.

It’s just one more in a long line of prescient calls.

If you’d like some insight on how he was able to do that, go here.

Regards,

Terence Duffy,

Lead Researcher, Cycles, Trends and Forecasts

From the Port Phillip Publishing Library

Special Report: The biggest stock gains can come from the least likely places. While the ASX fell 9% in the 12 months to November 2015, one tiny, hated mining stock soared 1,200%. What seemed like an ugly, bad investment quickly transformed every $5,000 worth of shares into $65,000. This is the power of ‘10-bagger’ companies. Where will the next one come from? Read Greg Canavan’s special Crisis & Opportunity presentation to find out…(more)

Terence Duffy

Terence Duffy

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles. His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts

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