As you may have noticed the global capital market volatility since the beginning of the New Year, with the plunge of oil prices and the bouncing around of the Chinese currency exchange rate, I thought it’d be interesting to share my view on China, as a recent immigrant who has spent 22 years in China and 5 years in the U.S..
Players in the Chinese Stock Market
The Chinese stock market (A share) is not a good reflection of the Chinese economy. This is because about 70 to 80% of the job market is contributed by the privately-owned companies which make up about 20 to 30% of the economy. However, the major participants in the Chinese stock market are the state-owned companies, not the privately-owned firms, looking for partial liquidity for their key employees and low-cost financing for their new projects. The private companies only account for a much smaller share. Additionally, the Chinese stock market has a relatively large number of individual investors, represented by the “Chinese Dama” being quite active on the daily trading floors of the stock exchange, which is not what you commonly see in a more mature capital market. The rise and fall of the Chinese market is still largely driven by governmental messages and economic reform policies. With these unique characteristics, in the short term, the Chinese stock market reflects more of its investors’ behavioral reactions and less of its long term economic dynamics. Meanwhile, it has a long way to go in order to develop into a more mature capital market with the full inclusion of its private industries.
Recent Chinese Currency Volatility
The relative devaluation of Chinese currency is largely a consequence of the Fed’s commencing its policy of normalizing interest rates. Although the Fed has given the world enough time to develop expectations of its move, the actual impact is still dramatic. Virtually all other currencies devaluated against the U.S. dollar at the same time and each country has been trying its best to minimize the negative impacts, but unfortunately not all countries have been able to achieve their desired goals due to various political and financial complications, as seen in the cases of Brazil and Russia.
On the other hand, the relative success of Chinese governmental intervention demonstrated its strong financial capability (with just under $3.5 trillion in reserve and a large current account surplus) and determination to stabilize its currency exchange rate and ultimately its economic transition to a consumer economy. This will hopefully benefit and promote its economic structural reforms in the next decade, and will eventually benefit the global economy and capital markets overall.
However, the Chinese manufacturing industry is still facing the challenge of a liquidity shortage. The downward pressure on the manufacturing industry is wide spread, and is also reflected in the recent market volatility. The Chinese government has noticed the manufacturing challenge and is worried that it could domino into social unrest. As a result, the Chinese government has been rolling out policies to accelerate its economic transition and structural reforms.
Time for the World to Adjust Expectation of China’s Growth
Whereas in past years when we were used to seeing China provide high single digit or double digit annual GDP growth, it takes time to adjust expectations to the changing fact that after 30 years of high-speed growth, China is at the point of entering its next growth stage. To do this, China will need to transform from a manufacturing-driven economy to a consumption-driven economy. This will lead to lower GDP growth of about 5 to 7% per year, nevertheless, it is still growth, and the world will need to adjust expectations accordingly.
The Generational and Cultural Shift
China has been known as a country that has highly valued savings for decades. However, the emerging generation, mostly coming from the one-child policy families, holds very different economic views than their parents and grandparents. The millennials (more than 400 million) are growing up with an abundance of resources and view spending being as important as savings, if not more important. They love swiping their credit cards for “good deals” globally and they love travelling and investing in personal growth and health. The world shockingly witnessed on November 11th, 2015 that the Chinese shoppers spent nearly $8 billion (about 50 billion yuan) in the first 10 hours of Alibaba’s “Single Day Festival” online promotion, which is about $1.4 billion more than the $6.6 billion in online sales during the five-day period from Thanksgiving to Cyber Monday in the U.S. in 2014, according to the Internet analytics firm comScore.
China and U.S. Trade
Despite the economic growth challenges China faces today, it is not a major export market for the U.S. compared to Canada and Mexico. Instead, the U.S. imports three times as much in goods and services from China as it exports to China. The slowdown in China actually has less impact on U.S. trade compared to other nations who rely heavily on exporting to China.
Conclusion and Take Away
China is facing economic transitioning challenges, but the Chinese government and its people are looking for solutions and have been taking actions towards its soft landing. Although there is no guarantee of the results, I hope I’ve provided some insights into the Chinese markets and economy going forward.
Feel free to contact Danqin (Kristin) Fang with any questions by phone 305.448.8882 ext. 222 or email: KFang@ek-ff.com