China’s Landing Pattern
While it’s still considered an emerging economy, there’s no doubt China has held a good deal of influence over the global markets. Analysts and economists seem to wait with bated breath for any piece of data that confirms or denies whether the country—regarded by many as a global growth engine—is set to keep on humming or if it has begun to sputter. I’ve said many times that my long-term outlook for China remains positive, but it is true that this year we have seen some evidence of slowing in areas of China’s economy such as manufacturing, housing and exports. So the question on everybody’s mind is: Will China have a soft or hard landing?
My view is: China may not be landing at all. How can we talk about a hard or even a soft landing when growth in China is expected to be 7.5% in 2012?1 A hard landing typically is viewed as a rapid slide into recession. I don’t see that happening here. A soft landing would be considered a decline in growth to 2% or 3% which again, is not in the cards. Some economists have used the hard and soft landing terms without defining what they mean. The World Bank seems to define a gradual slowing of growth as “soft landing”2 but a decline of growth from 8% to 7%, or from 10% to 8%, does not seem like a “landing” at all.
At the end of the day, we need to look at the facts and not speculate on what is not evident in the figures.
In the first quarter of this year, China’s growth came in at 8.1%, down from the 8.9% growth in the last quarter of 2011.3 Industrial production is rising at about an 11.9% annualized rate, and retail sales rose at a rate of 15% in the first quarter of 2012.3 Per capita total incomes are also trending upward. In urban areas, per capita total incomes in the first quarter of 2012 were up 10% on average, while in rural areas, 13%.3
Fixed-asset investment growth has been rising even faster, up 21% in the first quarter of this year.3 More specifically, manufacturing investment rose by 25% over the same period.3 In the real estate sector, year-over-year growth came in at 24% in the first quarter, particularly strong in the office and other commercial property sector.4 Investment in residential property rose 19% during the same timeframe. 4
Some of these recent numbers do represent a slowdown from last year, but they are also nothing to sneeze at.
I suspect that the root of the dire talk about China’s economic fate may be some previously overly bullish economists who are disappointed by the recent data, and as such, are sounding the alarm bells. My investment team and I are not only looking at the macroeconomic facts at hand, but as bottom-up investors, feel it’s equally important to examine company-specific fundamentals too. Our long-term view on China remains positive, despite the recent noise.
Our main investment themes in general have been focused on consumers and commodities. It is our belief that Chinese consumers are likely to continue gaining clout, and Chinese macroeconomic policy has increasingly been moving from an export-based model to one fueled by domestic demand. We also expect that demand for hard and soft commodities should remain strong as China and many other emerging markets industrialize, gain wealth and increase spending on infrastructure, which tends to tilt the balance between supply and demand in favor of producers.
1China.org.cn, China cuts GDP growth to 7.5%, March 5, 2012.
2 The World Bank, China Quarterly Update, April 2012.
3 National Bureau of Statistics China, April 13, 2012.
4National Bureau of Statistics China, National Real Estate Development and Sales April 16, 2012.