Last week China released its September GDP report, with the year-on-year growth figure coming in bang in line with expectations at 6.7%.
It was both unremarkable and remarkable, all at the same time.
Unremarkable in the sense that it was the eighth consecutive quarter where GDP either met or exceeded the median forecast by 0.1%, remarkable that given the size and complexity of the Chinese economy, it was exactly what policymakers were aiming for when they announced a growth target of 6.5-7% at the beginning of the year.
You couldn’t make it up, or perhaps you could.
The ability to hit these targets, seemingly at will, has many in the markets sceptical of the veracity of the data, particularly as it is produced less than three weeks after the quarter has ended.
It’s led to a perception across markets that the only time Chinese data is accurate is when it is weak. Anything else means it’s fake, simply a case of statisticians working backwards from the figure that they’ve been told to deliver.
Following the release of last week’s GDP figure, and after a momentary flutter across financial markets, it was business as usual for investors, seemingly adopting the view that it didn’t matter.
Rather than over-analysing the data, something that helped keep the Chinese economy plugging along this year — debt — appears to be the area getting the most focus, particularly in the future.
It’s certainly something that caught the attention of Kerry Craig, global market strategist at JP Morgan Asset Management, although, unlike other analysts, his interest is not in China’s debt levels, but rather the way they are perceived by financial markets.
“There’s no escaping the fact that the pace of economic growth is slowing, or the fact that economic growth has been fuelled by vast amounts of debt,” he wrote in a research note this week, asking whether this is “something that should keep us up at night?”.
In short, he believes the answer is no, at least not yet, saying that while China will eventually have to deal with the elevated levels of indebtedness, leading to even lower levels of growth, “there are actually a few things which mitigate the near term worries over the debt pile regarding the composition of the debt and who holds it”.
“(In China) the bulk the debt is held by the corporate sector and means that the government could, if it wanted to, take the debt away from companies and hold it at the government level,” said Craig, noting this was something that both the US and UK did after the financial crisis.
“Alternatively, Chinese officials could let companies start to default, a case of creative destruction, where inefficient state owned enterprises are shuttered as excess capacity is reduced.
“This would be done selectively and the number of corporate defaults is unlikely to be allowed to rise to a level that would disrupt financial stability or economic stability,” he says.
On the threat posed by a financial crisis enveloping China’s banking system, Craig says that “just over half of non-financial private sector debt (55%) is issued by domestic banks, and those banks are owned by the government”, something he believes “matters when it comes to assessing the risk of a systemic threat of defaults, which carries a lower probability if the debt is held by the public sector”.
He is also unperplexed by the current exuberance in China’s residential property market, saying that while it “still presents a clear economic risk”, it must be remembered that China’s household debt-to-GDP ratio is still relatively low at 20%.
For comparison purposes, Australia’s ratio is now around 120%, and growing.
“House purchases are mainly funded through cash or borrowing from relatives rather than banks and mortgages,” Craig says.
While not discounting the risk of financial stability in China in the future, Craig believes that “the structural debt problem appears to be contained in the near-term at least”.
Though China will eventually have to balance the risks of supporting near-term growth against the possibility of heightening financial risks in the future — a point that has now been raised on several occasions by the Reserve Bank of Australia — Craig says that the current efforts to stabilise growth has been beneficial to not only the Chinese economy, but also emerging markets.
“The stability of the Chinese economy creates a positive sentiment effect for the wider emerging markets universe and commodities,” he says.
“The diminished fears of an abrupt collapse of the Chinese economy has been one factor behind the stronger performance of emerging market assets this year.”
As a result, he says that “emerging market equities and debt can continue to perform well as growth rates increase and company earning expectations are revised upwards”.
While he’s confident about near-to-medium term outlook, Craig also acknowledges “it may not be a smooth ride” with “the danger of a stronger US dollar and anticipation of higher interest rates in the US” something that needs to be considered.
That’s something markets discovered all to well earlier this year, and, partially as a result, led to Chinese policymakers loosening the fiscal taps to bolster economic activity.
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