16th July 2012
The BBC headlines may have pointed to the ‘sharpest slowdown since the global financial crisis in 2008' as the annual pace of economic growth slowed to 7.6% from 8.1% in the three months to the end of June, but most markets and commentators did not make similarly catastrophic interpretation of the data.
Simon Ward, chief economist at Henderson says the Chinese economy could disappoint both "hard landers" and reaccelerationists during the second half, with leading indicators and monetary trends suggesting stable, slow growth: "Six-month industrial output expansion was an estimated 4.0% (not annualised) in June, little changed from April and May and below a 6.9% average since 2005. This performance is consistent with recent moderately soft PMI results."
King Fuei Lee, Asia Equities specialist at Schroders Singapore, says: "While a slightly disappointing reading, it is unlikely to be enough to prompt large-scale policy action: demand-tweaking and further market liberalisation appear to be the preferred options. In fact, real growth in the first half year, at 7.8%, remains above the official 2012 target of 7.5%."
In other words, China has largely been doing what it said it would do – shifting from a high speed economy, to a higher quality economy. James Weir, Asian investment specialist at Guinness Asset managers says: "Economic activity is rebalancing from fixed asset investment towards consumption. Consumption growth is a major driver of policy in Asia. China is already a major consumer by global standards."
He adds: "It's now known for much more than just growth, with many firms offering decent cash-flow returns, good dividends, and better capital structures than some counterparts in the West. Indeed, certainly from the perspective of leverage, perhaps Asia should be seen as less risky than the West these days. Corporate governance has also improved a lot – firms are closely scrutinised, and although the blow-ups are eagerly covered by the media, these are now few and far between."
This apparent predictability is in sharp contrast with the increasing unpredictability of some Western institutions. In particular, the recent increase in the losses at JP Morgan expose the idea that Western standards of corporate governance necessarily create more reliability for investors.
"JPMorgan said Friday that the losses totaled $4.4 billion in the second quarter and Dimon said the most the firm could still lose is $1.7 billion. But he also noted that "it doesn't have to lose money at all." Dimon said the CIO would no longer trade derivatives, which were behind the big loss. Instead the investment bank will be unwinding the original trades." The original loss was estimated at $2bn.
This begs the question that if this scion of Wall Street can ‘lose' $4bn quarter to quarter, which is the more reliable investment market? Does the complexity of Western markets make them vulnerable?
This ‘complexity' question is picked up in a new book – The New Few, or a Very British Oligarchy: Power and Inequality in Britain Now by Ferdinand Mount – but this time making a comparison with Russia: "You can tell Russia is not a real democracy because there is no great mystery about its politics. Democracies are slightly baffling in how they work: just look at America; just look at Europe; just look at us. In Russia the basics are easy to understand: people use money to get power and power to get money." A similar argument could be made for China. It has less working parts and therefore its economy is more predictable.
A lot of time and effort is devoted to working out the real picture in Western economies. Is it possible that data in China – for the time being at least – is likely to be more predictable? It is a command economy, with less complexity, and as such, should have less scope for misinterpretation.
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