China: the great collapse isn’t coming (probably)
Everyone's gloomy on China at the moment. But while it's true that Chinese growth has slowed, there are plenty of signs of improvement and stability, says Merryn Somerset Webb.
I'll write more on China later this week and it is worth everyone watching my latest video interview with Paul Hodges (subscribers will be able to read the key points in the magazine this week).
But amid all the gloom and forecasts of dramatic collapse, there are some interesting numbers out there. The most recent quarterly report from the China Beige Book (which is jammed full of pretty definitive proprietary data on all things Chinese) presents an almost happy picture.
The Beige Book has been reporting on the slowdown in China since 2012 (as have we). But today, in the aftermath of surprise devaluation in August, its authors reckon that global sentiment on China is now far too bearish.
Everyone thinks the slowdown is intensifying; it isn't. In fact, in the last quarter "job growth inched up for a second straight quarter, as did margins, and wage growth moderated only mildly. Capital expenditure also ticked up for a second quarter in a row, following the four quarters of broad decline."
Everyone also thinks that China is now suffering from deflation, as evidenced by plummeting official PPI, and that this is battering firm profits. This is also nonsense says the Beige Book. "A common story is that the CPI reflects wages, and the PPI sales prices, so the recent divergence of the two is eviscerating companies' bottom lines". But "for now, the CPI is being driven by food, not wages, while the PPI is being driven by imported commodities, not domestic oversupply."
So, together, these things are not hitting profits something that is backed up by "the responses of thousands of firms in our national survey." China doesn't have deflation; it has low and stable inflation the kind of thing economies are supposed to crave. So there you have it: Chinese growth has slowed with the slowdown concentrated in the public sector - but there is no collapse in sight.
The Beige Book isn't the only optimistic outfit in town. Capital Economics has just produced a similar piece of analysis. It has its own China Activity Proxy (CAP), which attempts to use a set of indicators to "track the pace of growth in China without relying on the official GDP figures". Today it is saying that the "economy is expanding at a markedly slower pace than the official figures show". That bit isn't interesting; we all know that.
What is interesting, given the global growth hysteria, is that, just like the Beige Book, "the CAP doesn't support the view that conditions have deteriorated recently". Instead, it suggests that growth has strengthened rather 4.7% year on year last month, and "if anything, appears to be on an upward trajectory".
Domestic freight volumes are strengthening; growth in electricity output is back in positive territory; the volume of cargo passing through China's seaports is at an eight-month high; and " growth in passenger traffic, a measure that captures both business and leisure travel, also edged up," says Capital.
Investing is about seeing things that other people aren't seeing. Today, everyone is seeing the slowdown in China that we started talking about some years ago. Not everyone appears to be seeing the signs of improvement and stability that Capital Economics and the Beige Book are seeing.
There is opportunity there as George Osborne appears to have noticed.As he said in his speech at the Shanghai Stock Exchange yesterday: "Whatever the headlines, regardless of the challenges, we shouldn't be running away from China".