Market Report

China’s coming back

The Wall Street Journal’s Alex Frangos hit the nail on the head in early June when he wrote that “the worry with China” was that it might be time to start worrying again. The noise around the Chinese economy after the January stock market crash had only just yielded when Frangos penned his trenchant analysis, but a trove of new economic data was already underway that would go on to paint a picture of an economy slowly moving sideways again, if not sputtering.

“Signs of meaningful improvement China bulls seized on a couple of months ago are harder to find,” the Hong Kong-based journalist wrote – indicating that there is still ample scepticism in the market as to whether the People’s Republic has a viable strategy in place to perform in an increasingly fragile world economy. After all, issues within the world’s second
largest economy can easily crimp global growth, a big concern at a time when weak oil
prices and geopolitical concerns are also clouding the outlook.

“The brief bounce in the industrial parts of the economy that excited commodities markets is [already] fading again,” Frangos followed up, with yet another set of economic data released by authorities in mid-June augmenting his worry: It found that the pace of Chinese investment growth slowed sharply in the first five months of 2016, blunting a recent rally in the traditional sectors and renewing uncertainty over China’s future outlook.

To many analysts’ concern, the rate of fixed asset investment growth fell to 9.5 per cent, the slowest in 16 years and well below economist forecasts of 10.5 per cent. Even more prominently, fixed asset investment growth from the private sector was just 3.9 per cent, compared to 22.3 per cent growth from the state sector – likely reflecting waning confidence in Chinese businesses as well as casting doubt over the government’s ability to rein in debt-fuelled stimulus, particularly if it is to reach its 6.5 per cent GDP growth target for 2016.

Does that automatically mean the world’s second-largest economy will be losing steam again, though? Not necessarily, at least if you believe Australian business journalist and China expert, Rowan Callick. Seconding Frangos’ viewpoint, he says China has arrived at a crossroad where the nation’s goal of “getting rich before it gets old” has to be balanced with the world community’s call for a smooth transition toward a more consumer and market-led profile.

Pointing to the rhetoric of a meeting held between key members of the world’s two most influential economic powers last month, he sees cause for optimism that the economic malaise that has settled over the Middle Kingdom might be shaken off as early as September, when the G20 Summit will be held in the ancient city of Hangzhou.

“The … dialogue between the US and China provided a great opportunity to lay the groundwork for this last G20 before the US elects a new leader and before China’s President Xi Jinping, though guaranteed a further six years in office, starts to focus on the crucial five-yearly communist party congress that will line up his replacement and cast, in nuanced ways, its verdict on his performance so far,” Callick summarises – indicating the world’s political leadership must have a vested interested in creating a stable foundation for China’s future, especially with the G20 Summit and the US presidential election in mind.

What’s more, with many an economic indicator still in the green – or at least not poor enough to provoke a drastic reaction by the central bank – both Callick and Frangos agree there is still ample room for a course correction. Real estate investment, for instance, rose a healthy seven per cent in the first five months of the year compared to the same period 2015, while property sales by area increased 33.2 per cent. At 10 per cent, retail sales growth in May was largely steady too.

According to Callick, however, China’s economic future will largely come down to the kind of legacy the current government is planning to leave behind. “China’s leaders have yet to clarify how they’ll handle the conflict between adding more fuel to an overextended credit cycle, and growing risks in financial markets, in property markets and in industry,” he explains. “Is [President Xi] a determined reformer who faces continued opposition from state-owned enterprises, banks, provincial elites and elsewhere … or is he an economic blunderer, who can’t help leaning towards state-owned enterprises, towards the party continuing to price risk, and towards stimulus-spending to sustain high growth?”

For those in the transport equipment industry, the positive message coming from the pre-G20 meeting should serve as a calmative, even though they are likely to remain tense for the time being – especially given the up and down they’ve had to experience since the stock market rout in January. The Economist has been especially sceptical regarding the meeting, calling it more of a “friendly-sounding gesture” than anything else.

As a case in point, the magazine points to China’s pledge to cut excess steel production, which has been depressing global prices and upsetting steelmakers in America and elsewhere, saying it won’t help eliminate the glut. “[The meeting] showed that some progress is being made by the mutually suspicious powers. But it has been only tentative. Remaining problems are intractable and dangerous.” With that in mind, can the upcoming G20 summit turn the situation around, as Callick suggests?

Some experts say the Australian may be a little too optimistic with his prediction. While China has established “building an innovative, invigorated, interconnected and inclusive world economy” as the main theme of the Hangzhou agenda – responding to what it calls ‘upstream elements’ such as trade protectionism, anti-globalisation moves, regionalism, the irresponsible export of inflation and competitive currency devaluation – it also pointed out it won’t mix things up with its “private affairs”.

As such, the world community will likely have little input in China’s immediate future – and with it transport industry development – even though the nation is open to change in the long-term. Explains Robert Perkins, Senior Global Business Consultant at US research company ACT: “Domestic demand for China commercial vehicles will remain subdued for the foreseeable future, until changes in both the country’s economy and the evolution of its transportation industry have stabilised.”

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