Most agree that the higher-than-forecasted 7.8% GDP figure recorded for China’s economy in the third quarter is an aberration and unlikely to be sustained going forward. All the same, though, some investors are still bullish on the world’s second largest economy as it heads closer to 2014 and continues on its trajectory toward becoming an economy driven more by domestic consumption and less by exports.
“Some of the Q3 growth can be attributed to the temporary stimulus created by the central government, and my feeling is that growth will slip back to 7.3% for 2014, slightly below the 7.5% figure China will post for 2013,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo. “But still, that’s quite a clip and different sectors of the Chinese economy have been posting figures that clearly support the rebalancing of the economy toward domestic consumption.”
Retail sales, for example, rose by 13% in the third quarter, Jacobsen said, while industrial sales increased by 10%. “These are the kinds of numbers we’ve been seeing on a consistent basis and that we will continue to see,” he said.
The third quarter GDP figure shows a bit more momentum in China’s economy than was otherwise expected, albeit that the quarterly numbers are drawn from a very narrow sector base compared to other countries such as the U.S., where 200 industrial sectors are used as a sample, according to Edmund Harriss, investment director at Guinness Atkinson Funds in London.
Still, “I would agree that momentum has returned and this is good,” Harriss said. “Now, it’s also clear to me that the Chinese government wants to push forward with its reform program, which will be announced in November, and the overarching goal is still to reallocate capital to consumer and service-oriented areas.”
That shift, of course, has been going on for a long time and it continues to proceed far more slowly than most would like it to, evidenced by the fact that consumption made up less than 50% of growth in the first three quarters of this year.
However, China is a massive country and according to Jacobsen, “it’s still recovering from the [Mao Tse Tung] years.” The government has been spending a great deal on infrastructure (overall investment in the sector was close to 30% for the first three quarters of the year), which means that support for the sectors that would drive the consumption economy has taken a backseat, but Jacobsen said that this kind of “catch up investing” in infrastructure, particularly in the housing sector, is necessary for China to move forward and will lay a better foundation for the consumption economy.
Looking ahead, Jacobsen expects that exports will still continue to drive economic growth in China and that that will be supported by a continued recovery in the global economy. However, judging by the strength of retail sales and the improvement in other sectors, he also believes that there will be continued growth on the domestic consumption side of the economy, regardless of continued government spending on infrastructure.
He also expects a significant increase in private sector investment spending by businesses, that such undertakings as the recently announced Shanghai Free Trade Zone will enable.
“I am very excited about the Communist Party’s decision to turn Shanghai into a free trade zone, as it’s a very visible move to the rest of world,” Jacobsen said. “Look at how successful Hong Kong has been given its relative autonomy from the government, so I believe that Shanghai is a prelude to what we can expect for the entire nation and I wouldn’t be surprised if over the next five to 10 years, the government doesn’t take the Shanghai model and roll it out to the whole nation. Starting out this way is prudent way to roll things out as it doesn’t create a lot of political disruption.”
China’s modus operandi has always been to do things gradually on a “pilot project basis to measure success before taking things forward in a bigger way,” Harriss said.
For foreign investors the big question is still whether China will fall into a morass of debts and unwanted infrastructure, and to make sure that doesn’t happen, many changes have to be made. However, “the Shanghai Free Trade Zone is a visible sign of progress and one that should attract foreign investors and businesses of different kinds,” Harriss said, and will also help in bolstering the rebalancing toward a more consumption-driven economy.