In January this year, Chinese premier Li Keqiang, who is responsible for steering the world's second largest economy through increasingly choppy waters, went to the World Economic Forum in Davos to ease growing jitters about China's prospects, saying his country would avoid a hard landing and had a long-term focus on medium-to-fast growth.
China is growing at its slowest pace in three decades, but the line from the ruling Communist Party, under President Xi Jinping, is that this is part of the master plan.
The party says that while it is aware of risks inherent in local government debt and shadow banking, it was aiming for a smooth “soft landing” into a “new normal” era of sustainable growth, far slower than the rate that made the economy the world’s second largest in the past two decades, but one more appropriate after years of high-octane expansion.
Xi has kept the same mantra up since then.
The Chinese economy, which accounts for 15 per cent of global GDP, was refocusing, Li said, moving away from the days of being the world’s factory and biggest exporter of widgets, investing trillions in infrastructure projects, to becoming a high-tech haven with service industries and entrepreneurs.
Months later, it seems the rest of the world is waking up to the reality of “new normal”; the global stock markets are so unsure of what to make of it they are following the lead set by Chinese small-time investors and selling off at a furious pace.
China’s key indices have lost about a fifth of their value and wiped out nearly all of this year’s gains in six days of trading.
The market is disturbingly volatile. The benchmark Shanghai Composite Index closed up 5.34 per cent yesterday, having lost 23 per cent of its value in five successive days.
The cause of the slide appears to be a deeper anxiety about the state of the Chinese economy as there has been no significant new information to inspire such a significant sell-off.
The only major new data in recent weeks that might prompt the stock market’s discord was August’s Caixin General Manufacturing Purchasing Manager’s Index (PMI), which hit its lowest level since 2009.
Debt has increased to more than twice the size of the economy, but at the same time there is a very high savings rate in China, huge foreign reserves and retail sales are still climbing, up 10.5 per cent in July from a year earlier.
The services sector is also doing well as the economy switches out of old-school manufacturing.
Diana Choyleva, chief economist and head of research at Lombard Street Research, has a reputation as a bit of a bear on the Chinese market. She said she was heartened by the progress that Xi was making with his reform plans, but still believed that real Chinese GDP growth was set to average at most 5 per cent in this decade.
“Even if the authorities do the right reforms successfully, there’s no way for the economy to continue to post the previous miracle growth rates,” Choyleva said.
Currency war
The best China can hope for is achieving a consumer-led expansion after a few years of weak growth and financial distress, she said.
“An important aspect of the story going forward is that China’s future is not at all entirely in Beijing’s hands any more. The interaction of policymaking in Beijing, Tokyo, Washington and Frankfurt will determine the Chinese and global outcome. The ongoing currency war and the spectre of protectionism remain crucial threats,” said Choyleva.
However, others feel the slide of recent days and the handwringing over the state of the Chinese economy are overdone.
Nicholas Lardy, writing in the New York Times, finds little evidence that the Chinese economy is slowing significantly from the 7 per cent rate outlined by the government.
“Wage growth is running at about 10 per cent annually; the pace of creation of nonagricultural jobs is stronger than in any recent year; both real disposable income and consumption expenditures of Chinese households are growing strongly. It is not the picture of an economy heading for a hard landing,” said Lardy.
He said the recent stock market collapse was an overdue correction in the equity market, not a sign of economic meltdown.
“And the connection between China’s equity market and China’s real economy has always been tenuous,” said Lardy.
The way the slide in Chinese markets spilled over into the international arena shows how deep are international concerns about the outlook for the Chinese economy, said Duncan Innes-Ker, analyst for Asia at the Economist Intelligence Unit.
One of the factors driving the rise of the Chinese stock market is the absence of other investment vehicles in which people can put their money. The stock market for the longest time appeared “toppy”, and investing overseas is still difficult for the ordinary investor.
“However, the stock market in China is only a peripheral part of the financial system, and the repercussions from the slide in Chinese stock prices are likely to be limited. Much more important to the economy is the real estate sector, and the strong growth in house prices seen since April suggests that the outlook for the Chinese economy could be brighter than many assume,” said Innes-Ker.
With an apparent division between bulls and bears, the markets are watching to see what the authorities are doing about it, but the signals coming from Beijing are less than clear.
This week, China made its fifth interest rate cut since November, aimed at boosting activity by allowing banks to lend more money, but this did not stop the decline.
Devaluation
Earlier this month, the People’s Bank of China devalued the yuan in a move that took everyone by surprise. Between this and the rate cut, the government seemed to be trying to encourage people to borrow money to buy shares, which is the exact opposite of what happened when the markets first went into freefall back in July and moves were put in place to stop margin lending.
“Regulators should take a long look at their recent behaviour because the bourses’ future depends on government doing its job the right way,” ran a commentary on influential financial website Caixin.
“It is still too early for a thorough review of the costs and benefits of the government’s involvement in the stock market, but some judgments can be made. To start, the regulator should not have tried to get the stock index to go up.
“Also, the China Securities Finance Corp – a state agency which has played a central role in the government’s campaign to bail out the market – seemed to have picked stocks randomly, pouring capital into valuable and worthless companies indiscriminately. Critics have questioned the wisdom of these actions.”
There have long been question marks over the exact rate of Chinese growth. The Conference Board’s China Centre believes Chinese growth is probably running at more like 4 per cent, while Lombard Street Research sees it at 3.8 per cent, based on the economic slowdown having a greater impact than it appears.
Political manipulation
Economists regularly complain that Chinese gross domestic product (GDP) data is not to be entirely trusted, because they believe political manipulation goes on at local level to massage the figures to make them come out in line with what the government wants them to read.
During the disastrous agricultural experiment known as the Great Leap Forward (1958-1960), which triggered a famine in which millions died, local government officials were still producing figures saying harvests were improving as they feared revealing the true picture would bring down the wrath of Chairman Mao Zedong.
In July, London-based research house Capital Economics said it thought economic growth was being overstated by one to two percentage points because of a glitch in the way the data is calculated, referring to the calculation of the GDP deflator, the measure of price levels that is used to convert estimates of nominal GDP into real GDP.
By its theory China grew by between 5 per cent and 6 per cent in the 12 months to the first quarter of 2015, rather than the 7 per cent official figure from China’s national bureau of statistics .
