China’s economy has had its struggles throughout 2015 — a stock market plunge last summer followed by a messy currency devaluation — and it’s not off to a great start for 2016. On the first week of trading in the new year, Chinese stocks plummeted and the Chinese market shut down prematurely twice to stem rapid selloffs.
While many would believe this signals a weakening Chinese economy, Tocqueville Asset Management founder Francois Sicart suggests this is not necessarily a sign of weakness.
“[W]e are far from the gloomy forecasts of analysts who blindly trust GDP statistics aggregating very disparate sectors or, worse, who mistake stock-market fluctuations for evidence of economic strength or weakness,” Sicart writes in a recent commentary titled “The Seductiveness of the Average.”
Sicart points to research from Andy Rothman — whom Sicart calls “one of the most astute and least ‘bipolar’ analysts of the Chinese economy” — to help prove his point.
“[Rothman] acknowledged an emerging consensus that the country’s GDP would soon slow down from its breakneck pace of more than 10% growth per annum,” Sicart writes. “He warned, however, that this slowdown would not happen evenly across the board.” And, Sicart says, this becomes a problem because economists often measure a country’s or a region’s activity and growth rate by using statistics that bundle sectors or jobs that behave quite differently from each other in reality. Sicart describes how the different sectors in China reacted to its economic slowdown.
“Once the huge pent-up demand for infrastructure, plant construction and housing was satisfied, these sectors would settle into the lower growth rates typical of more-developed economies,” he writes. “However, household spending was still in its infancy, and would probably continue to grow at double-digit rates. It thus would remain ‘the world’s best consumption story’; but since it could not physically be expected to accelerate beyond the annual 11% of recent years, China’s GDP would naturally settle into a much slower growth trend.”
Sicart discusses how some of the numbers behind China’s current economic situation could be misleading.
Using Rothman’s research as well, Sicart breaks down what could be five misunderstandings:
First, China largely consumes what it produces, Sicart writes.
“Exports haven’t contributed to GDP growth for the past seven years,” according to Sicart. “Only about 10% of the goods rolling out of Chinese factories are exported.”
Second, manufacturing has not collapsed, Sicart says.
“Manufacturing is sluggish, especially in heavy industries such as steel and cement, as China has passed its peak in the growth rate of construction of infrastructure and new homes,” he writes. “But factory wages are up 5% to 6% this year, reflecting a fairly tight labor market, and more than 10 million new homes will be sold in 2015.”
Third, according to Sicart, China has remained the world’s best consumption story. “China has rebalanced away from a dependence on exports, heavy industry and investment: Consumption accounted for 58% of GDP growth during the first three quarters of this year,” he writes. “Shrugging off the mid-June fall in the stock market, real (inflation-adjusted) retail sales actually accelerated to 11% in October and November, the fastest pace since March.”
Fourth, unprecedented income growth is the most important factor supporting consumption, according to Sicart.
“In the first three quarters of this year, real per-capita disposable income rose more than 7%, while over the past decade, real urban income rose 137% and real rural income rose 139%,” he writes.
And fifth, according to Sicart, the strong consumer story can mitigate the impact of the slowdown in manufacturing and investment – but, he says, “it can’t drive growth back to an overall 8% pace.”
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