Economic deceleration in China in the fourth quarter of 2018 wasn’t significantly sharper than expected and a hard landing for China still isn’t on the horizon, said Andy Rothman, investment strategist at Matthews Asia in a recent Sinology report.
Rothman explained many investors were worried due to the perception that in the fourth quarter of 2018 China’s growth slowed more sharply than expected. “With final data for 2018 now in hand, let me explain why that perception is not accurate,” he wrote.
Rothman highlighted that inflation-adjusted income growth slowed slightly year-over-year, to 6.2 per cent from 6.9 per cent in the fourth quarter of 2017, which was within his expectations.
A surprising data point was that the nominal growth rate of retail sales of consumer goods by larger firms slowed to 2.6 per cent from 7.3 per cent in the fourth quarter of 2017, he said.
However, digging deeper into the data, this was driven by a sharp drop in automobile sales and a decrease in global oil prices, Rothman explains in an interview with Canadian Investment Review. “If you take out the autos then it was actually a pretty healthy year in terms of consumer spending last year.”
It’s also important to understand the reason why there was such a decline in auto sales. “I think it’s important to get down into the details and to recognize that autos didn’t collapse because people didn’t have money or [were] afraid to spend the money,” he says. “It was because there were some pretty big tax breaks temporarily in 2016 and 2017 that drove forward a lot of demand, and therefore it’s not surprising that car sales were weaker last year.”
Rothman says a big issue in China right now is sentiment, driven by concerns like the U.S.-China trade tensions.
Based on conversations on the ground, he says people are concerned a tariff dispute could spill into a bigger “Cold War-style relationship.”
Another reason sentiment may be low is that, in the early part of 2018, President Xi Jinping’s public statements seemed to indicate his support for state-owned companies rather than private entrepreneurial firms, says Rothman. “I don’t think this ever turned into . . .policies deliberately designed to hurt private companies, but it affected sentiment among entrepreneurs who were wondering, ‘Why is he saying these things and might he do something bad to us?’”
The sentiment also suffered due to the unintended consequences of the de-risking of the financial system, he says. “They were doing good stuff for the long term —cracking down on shadow banking and risky [peer-to-peer] loans — but hadn’t really thought through that the short-term impact on private companies who were gaining access to credit through those channels was going to be negative.”
While these factors affected sentiment in the past, Rothman predicts these will improve this year.