Pre credit crunch, the Chinese economy had been expanding at a tremendous rate; China’s GDP growth in the mid-teens combined with booming housing and stock markets clearly signalled a case of overheating.
Refreshingly, the government was aware of this and proactively tried to slow growth.
Unfortunately those intentions coincided with the collapse of the external environment – and a global financial crisis – resulting in a severe contraction in demand that has left exporters in the Asian region struggling.
Realisation that the financial crisis sweeping the globe would impact Asia both directly and indirectly led to the Chinese government changing tack in record time.
Within a matter of weeks China’s economic policies had turned aggressively expansionary.
Reserve requirements at the banks were eased and interest rates cut, and the government also had the vision to unleash a headline-grabbing RMB4trn stimulus package – 13% of GDP – to offset the expected demand shortage from collapsing trade.
We should also remember that while in the West much of the economic collapse is rooted in over leverage, in the East it is really a demand shock, with balance sheets – consumer, corporate and government – in much better shape. Indeed the state’s stimulus seems to be working, with bank lending growing, property values recovering and even autos sales rising.
Turning to the stock markets of the region, there is real potential. Over the 30 years or so of fast growth in Japan, its stock market rose over 40 times – the Chinese stock market has barely moved in comparison. It is young and at an early stage. More excitingly, the markets of the region are a stock pickers’ dream – inefficiencies are rife, with participants focused on short-term news flow and momentum.
With an inefficient market expanding all the time, the number and quality of companies on offer continues to increase. There is considerable opportunity within this investment universe to add value.
In summary, as one looks out on a global economy plagued by fear, there is a danger that the bigger picture is being overlooked.
By any measure, the re-emergence of China is happening with scale and speed, and should persist for many years to come.
The underpinnings are solid – further industrialisation and urbanisation, high levels of savings and the need for additional infrastructure, to name but a few – and closer ties with the outposts of Taiwan and Hong Kong continue to yield exciting investment opportunities.
James Budden is marketing director, wealth management at Baillie Gifford
