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Rothman: No hard landing for China

By NexChange
Asset Management

While half of the world debates the veracity of China’s GDP growth data, Matthews Asia’s strategist Andy Rothman would rather that people focus on something much more important – the nation’s apparent shift from exports to consumption:
“The figure is just a tad below the 7% pace of GDP growth for the first two quarters of this year, and is 0.3 percentage points slower than the 3Q14 pace of 7.2%—which was 0.6 percentage points slower than the 7.9% rate in 3Q13. This is the inevitable deceleration of China’s growth due to changes in demographics, slower growth in construction activity and the base effect. The financial media will likely be able to write headlines about the slowest GDP growth rates since the Tang Dynasty for many quarters to come. But is that really the most important part of the story?

We are pleased to see that the rebalancing of China’s economy toward consumption and away from exports and investments continues to make significant progress. This rebalancing is key to our investment strategy. For the first time ever, services and consumption (the tertiary* part of the economy) accounted for more than half of China’s GDP, at 51.4%, up from 41.4% a decade ago. This mitigates weakness in manufacturing and construction (the secondary* part), and, if this rebalancing continues, it should mean that macro deceleration will be gradual.”
That would be great, but unfortunately, his argument does have a few holes in it. For one thing, there was just no way services put on a good show in the third quarter. As the always astute Christopher Balding pointed out following the GDP release:
“Service growth was boosted enormously in Q2 by the enormous increase in financial services from the stock market bubble. Given the collapse in the Chinese stock market in Q3, by almost any measure such as price level, margin lending, or trading volume, it seems shall we say puzzling that service growth remained so robust.”
Consumer data meanwhile seems to be a little murky. Clothing and electronic outputs have not been great, which doesn’t seem simpatico with the supposed 10.9% climb in retail sales.

Nevertheless, given how Matthews’ funds are doing – the Matthews China Dividend Fund returned 8.45% YTD compared to the MSCI China’s negative 3.44% – chances are these guys know a thing or two about what they're doing. Stay tuned.
Photo: Jim Winstead

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