The Western financial media hasn’t stopped talking about the economic doom which is apparently engulfing China. “Foreign direct investment into China slows as investors pull out money,” says the FT. “China’s quant clampdown risks damaging fragile markets for years,” warns Bloomberg. “China’s growth prospects seem structurally weaker,” The Economist tells us.
But amidst all this talk, Premier Li Qiang, President Xi’s deputy, was announcing a growth target of 5% 2024. For context, the UK economy is expected to grow by 0.8% this year and Germany by 0.2%. France’s forecast is slightly stronger at 1%.
In the States, where the Federal Reserve cannot stop talking about how well the economy has recovered from the pandemic, growth is predicted to reach a whopping 2.2%. So, at a time when China is on the verge of economic collapse, the FT and Bloomberg would have us believe, its economy could grow at more than double the pace of the US.
It cannot be the case that Li is simply talking up the prospects of the Chinese economy for political reasons. Global investment bank ING also has its 2024 China forecast at 5%, with a Reuters poll of economists’ forecasts only slightly lower at 4.6% (which is still more than double than that of the States).
It’s true that there have been stock market declines in China this year. The Shanghai Stock Exchange is up almost 3% year to date. Losses on the Shenzhen Stock Exchange are minimal at 5%. These are hardly complete collapses, even if certain sectors, such as real estate, have been hit harder than most in recent months.
Ignoring the fact that the losses on stock exchanges are not as serious as many suggest in any case, foreign investors have not fully appreciated that China does not care about its stock market as much as Western governments. It does not view the performance of its stock market as a particularly important arbiter of economic performance. Any declines that do happen do not, as a result, cause too many sleepless nights in Beijing.
Mark Tinker, Managing Director at Toscafund Asset Management in Hong Kong, recently made precisely this point. He said it is difficult for Western financial institutions to grasp the lack of importance China places on its stock markets because “particularly in the US, the stock market is so tied up with consumer confidence and it’s one of the prime focuses of the Federal Reserve.”
“In China, companies don’t need capital [from stock markets]. They’re getting their capital from cash flows; they’re getting their capital from the private side. The stock market does not provide the same service in China,” he explained.
The West’s inability to grasp this reflects a profound misunderstanding of how China works and how it intends to grow its economy. Unlike other emerging markets, which have grown by attracting foreign direct investment and privatising lucrative industries, China intends to pursue what policymakers in Beijing call “common prosperity.”
This includes a much more active role for the state both in promoting growth, and less reliance on foreign investors. This is easier to achieve in China than in other emerging markets given the huge domestic market it can tap into.
Common prosperity” also means the state reducing inequality and curbing some of the excesses of corporate capitalism, as they see it. This agenda is almost unaffected by stock market gains or losses. When it comes to financial markets, China sees the growth of the finance sector as more about developing a sophisticated pensions and savings system, rather than encouraging a speculative stock market that foreign investors can profit from.
As Tinker said, “the West has spent years assuming that China was just another emerging market, and it was going to drive everything with lots of borrowing and lots of leverage.” This is clearly not the case.
Of course, there are opportunities for foreign investors to make money in China and in Chinese companies. Baidu is just one example of a Chinese company that currently appears undervalued by stock markets. But foreign investors should not expect the authorities in Beijing to inflate stock market bubbles as this does not serve any of their strategic economic goals.
As Tinker said, “there is value in China but they’re not following our script.”
Author: Harry Clynch
#China #StockMarket #CommonProsperity #Asia #CapitalMarkets
