Chinese whispers, revolving doors

Where did it all go wrong, Mr China? One minute you are the saviour of the world economy, the next no-one wants to know because you are ‘only’ delivering 7.5% growth. Even so, with a potential banking crisis in the wings, export data sliding and only the widely mistrusted GDP numbers for comfort, to what extent is China in real trouble?

Markets breathed a sigh of relief as the latest set of Chinese GDP figures came in on target at 7.5%. The June trading numbers had been weak, raising fears the country would miss its growth targets for the first time in 15 years. However, some commentators are far from reassured, arguing export and import data is less easily manipulated than GDP data.

It is actually possible to argue both the banking problems and the weakening trade figures are all part of the plan. After all, the rise in the interbank lending rate is a direct result of attempts by the People’s Bank of China to curb risky lending. It has refused to direct money towards propping up the banks, reasoning that limiting smaller companies’ access to financing is a price worth paying to rid the system of its damaging excesses.

Equally, the Chinese government has long pursued a policy of wage growth to help drive the growth of consumer spending in the economy. This was always likely to make Chinese exports less competitive. Therefore, in theory, Chinese exports should be falling.

The problem remains that market expectations are so much greater, with the expectations for exports around 6.5% higher than the reality. No stockmarket can thrive against that kind of backdrop.

A number of managers have said the underperformance of Chinese – and as a consequence, Asian – stockmarkets will only reverse once growth estimates stop being revised lower. This could take a while.

It is also likely to take some time before investors believe they can actually make money out of Chinese companies. They did not make very much when growth was strong and they certainly have not made much since. There is a disconnect between economic growth and corporate earnings within China that has yet to be resolved.

A lot has to happen before China starts performing well again. A brave contrarian might be willing to take a chance after such a lengthy run of underperformance and the stockmarket certainly has valuation on its side. Still, it is difficult to see sentiment turning any time soon.Ken Ferguson, Senior IFA at Ferguson Oliver sais: “Many investors fail to review the investment funds within their savings, investment and pension plans to ensure they remain aligned to the ever changing economic climate. The recent brutal reaction to the US Federal Reserve announcements on Quantity Easing Tapering has had a significant impact on Emerging Markets and investors should review investment funds in light of this switch in sentiment”.