China’s Economy ‘Not Going Over a Cliff,’ JPMorgan Says

Though GDP growth is slowing to 7.5% from a 10-year average of 9.9%, JPMorgan portfolio manager says

A stock board in Shanghai. (Photo: AP) A stock board in Shanghai. (Photo: AP)

China’s current economic reorientation may mean weaker growth, but it also brings the possibility for longer-term stability and positive reforms, according to a JPMorgan portfolio manager.

"China's economy is undergoing a slowdown, but in terms of real GDP growth year over year, it's not going over a cliff," said Emerson Yip, the lead portfolio manager for JPMorgan China Region Fund (JFC), on a call with investors Thursday.

“China will sacrifice some headline growth in order to focus on deleveraging and reforms,” Yip explained, since the country’s leadership views “quality and sustainability as [its] overriding objectives.”

Latest Figures

China’s exports and imports unexpectedly rose in April, according to several news reports on Thursday. Overseas shipments increased 0.9% from a year earlier. Imports gained 0.8%, giving the county a trade surplus of about $18.5 billion.

The country’s adjusted export growth improved to 6.7% in April from 3.5% in March. Exports to the U.S. rose 12%, according to Bloomberg data, while shipments to the European Union expanded 15.1% and to South Korea by 13.5%.

Still, economic growth is slowing down, as it has been since 2007. While the country’s 10-year average GDP growth rate is 9.9%, GDP growth was 7.7% last year. It is expected to be 7.5% this year, JPMorgan analysts say.

“We say you want to look at slowing growth as a time to pick up winners,” said Yip, “as a sustainable economic-growth pace is sought.”

What’s happening in the country’s economy?

“China is transitioning from being the world’s factory to being the world’s consumer, with longer-term implications,” Yip said during a question-and-answer period with investors. The country has been exporting deflation, he adds, and will eventually export inflation — “but that is years away.”

“In the long term, China’s rise should benefit everyone, including its reforms and sustainability objectives,” the portfolio manager added.

Equity Results

The JP Morgan China Region Fund improved 12.6% last year vs. 5.1% for its benchmark (which consists of the MSCI Golden Dragon Index, 80%, and the China Securities Index 300, 20%).

In the first quarter of 2014, though, the fund is down 6.4% vs. a 4.7% decline in the benchmark. “There were meaningful challenges” in the most-recent period, Yip described.

In the first three months of the year, the S&P 500 improved about 1.8%, while the MSCI Taiwan Index rose 1.1%. The MSCI Hong Kong Index, however, fell 3.4%, and the MSCI China Index declined 5.9%.

The JPMorgan fund, which has about $105 million in assets, is invested about 60% in China, 20% in Hong Kong and 20% in Taiwan. Major holdings include Taiwan Semi, Tencent Holdings (a Chinese-based Internet company), China Construction Bank and AIA Group, a Hong Kong-based insurance firm.

Yip acknowledged that the jury “is still out” on its reform process, making it important for investors “to approach this [market] with a healthy deep dose of skepticism.” Still, he added, China’s economic and political team seems ready to tackle the tougher tasks on both fronts” of reform.

“If we judge China’s leadership by the actions and words [focused on curbing] corruption and the other reforms that have been undertaken … in banking, currency markets and the brokerage space — and we see more to come — there signs of commitment and success that are strong in recent memory, dating back to the 1970s,” he explained.

Consumer Dynamics

Consumers in greater China are expected to “stay resilient,” says Yip, who notes that JPMorgan has an overweight stance on equities tied to Macau gaming, Chinese autos and China smartphones/Internet.

Demand for smartphones in the region should hit or exceed 400 million units this year, up from about 300 million last year. Auto demand totaled about 16 million vehicles in 2013, according to estimates, an increase from 14 million units in 2012.

Year-over-year growth rates for car sales, including SUVs, are put at 15% to 20%. Retail sales are growing at about 20% year over year, and are up from late 2013.

In addition, JPMorgan analysis shows that nearly 60 million tourists were projected to visit Hong Kong in 2013, the majority from China. The average rate of tourist visits to the island is growing about roughly 13% per year, while the growth of Chinese tourism is averaging 17% per annum.

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