Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

China’s Great Wall of Worry

By, 03/14/2014
Ratings414.036585

China’s having a Lehman moment! A hard landing! No, a soft landing! Credit crisis, housing bubble, fundamental weakness … People always seem worried about the world’s number two economy. So it’s no shock some slower-than-expected data released this week prompted another round of fears. But in our view, there is little indication the country’s slowing growth portends ill for its future or the rest of the globe’s.

Chinese growth started slowing in 2010, and fears were quick on its heels. In 2011, the media advertised how to say “hard landing” in Chinese—硬着陆 (ying zhuolu)—while so-called panda bears worried it would “probably lead to a world depression.” Ironically, overconfidence was considered one reason China would land hard. Some folks were still imagining how fallout would look in 2012, and others still believed it had already started. In 2013, hyperbole subsided some, but a landing of some sort was still thought inevitable.

What actually happened? China grew 9.2% in 2011, 7.8% in 2012 and 7.7% in 2013. Suffice it to say, there is still no landing—hard or otherwise—in sight. But that didn’t prevent renewed fears after January and February’s data disappointed. Trade kicked them off: Exports fell -18.1% y/y in February—contracting sharply from January’s 10.6% y/y growth. There was nothing fundamental suggesting weakness, though. The Lunar New Year almost always skews January and February results since the holiday lands in January some years, February in others or stretches across both, distorting the year-over-year comparisons. Combine the readings—which China does for most January and February data—and exports contracted a modest -1.6% y/y. Still a decline, but not a surprise after the government admitted exports between December 2012 and April 2013 were artificially inflated by exporters’ falsifying customs bills to disguise illegal capital inflows. This likely skews year-over-year trade numbers at least through April—more declines wouldn’t surprise.

Most other figures released Thursday had rosier results: January and February’s combined retail sales grew 11.8% y/y, fixed-asset investment rose 17.9% y/y and industrial output rose 8.6% y/y. But instead of appreciating the growth, many folks focused on missed expectations and slower rates of expansion than last year.

The data doldrums don’t much surprise, though—China related sentiment has turned more dour in general lately. Jitters still linger from a small solar firm’s recent bond default—the first onshore default since China’s central bank started keeping track in 1997. And what some feel are high credit levels—total Chinese public/private debt hit 226% of GDP in 2013—have been fueling credit bubble babble even as officials crack down on lending. But neither those, nor missed expectations, necessarily signal fundamental weakness. China is well-equipped to deal with any extant fiscal and banking issues, and the risks appear widely overestimated.

Plus, China is still growing! Don’t get us wrong: If China slumped to growth of 1 or 2%, it would be a negative. But that doesn’t appear at all likely. China probably just slows a bit from last year’s 7.7%. That might not sound wonderful, but even slightly slower growth compounds. Consider: Though China’s GDP growth has fallen from double-digit rates to mid-single digits in less than a decade, it has become the world’s second largest economy and keeps contributing greatly to global GDP—increasing its contribution by around $327 and $340 billion in 2012 and 2013, respectively.

That doesn’t mean there aren’t soft spots in China’s economy. Property sales did fall -3.7% y/y in January and February, after rising 26.3% last year. But we suspect the fall is a side effect of the government’s efforts to curb rising home prices. For years and lack of better options, many Chinese citizens bought second and third homes as investments, driving up prices. To keep housing more affordable for its rapidly expanding urban population, the government hiked property taxes and capital gains taxes and limited purchases of second and third homes. Falling sales now shouldn’t surprise. Moreover, weakness in one or two spots likely isn’t big enough to derail other thriving areas, like services, which grew in both January and February. And though exports hogged headlines, imports grew around 10% y/y in both months, suggesting domestic demand is resilient.

Chinese officials seem to agree. Where slowing growth might have spurred a massive stimulus package in years past, they seem pretty comfortable with a small slowdown these days. After the latest data came out Thursday, Premier Li Keqiang remarked that the State Council would consider annual growth of 7.2% in line with their target of “about 7.5%”—still perfectly satisfactory. Chinese officials know growth is slowing, and they want folks to set rational expectations. Which seems pretty inconsistent with a huge stimulus package, in our view—potentially disappointing anyone expecting a spending blitz. A few targeted measures like we saw in early 2012 and 2013 wouldn’t surprise, but a 2008-sized package doesn’t appear to be in the cards. Nor does it need to be—demand is rising, not falling.

A slowing China needn’t mean a weakening world, either. China’s issues are unique to China, and though some other Emerging Markets are experiencing hard times (because of their own problems), others are doing fine: Mexico, the Philippines and South Korea to name a few. And the Developed world is faring even better! There is no evidence of a worldwide demand dearth. Rather, fundamental strength is all over the globe—providing a good backdrop for stocks.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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