China: Newsroom doom and gloom

It seems you can’t open a newspaper without reading another negative headline about China. Most ‘western’ financial journalists love to write about trade wars, currency manipulation, shadow banking and mounting debt, the narrative being that China has a myriad of problems, the scale and potential ramifications of which are huge. But the veracity of these concerns is debatable and the potential impact incredibly hard to quantify.

For me it is important to simply take a step back and remind yourself how quickly investors’ and journalists’ sentiment towards China can oscillate – from boom to bust, from feast to famine. Last year, for example, there was mysteriously little mention of any of these troubles. Rather, it was all about the inexorable rise of China’s tech titans. True, the trade war rhetoric has significantly ramped up more recently, but those other issues have been pontificated on for years, yet disappeared from the headlines. It seemed all about accentuating the positives, be it tech related or the structural changes happening in the country’s stock markets, as MSCI included A-Share stocks in their indices for the first time.

The mood has now turned to bust, with ‘trade war’ the most vociferous death knell from many a doom-saying observer. While trade wars are clearly significant, the impact of a walk-back from globalisation is almost impossible to quantify. The chart below simplistically plots economic and market exposure to North America.

China’s direct exposure to the US is not that material. The percentage of US originating revenues generated by companies in the MSCI China index is a lowly 3%. China is a domestic market, with 90% of the revenues of listed companies being domestic in nature. The S&P, meanwhile, is much more international, with 30% of revenues derived from overseas (4% being from China). Economically, the US accounts for just over 5% of China’s exports.

The steady march towards globalisation has made global supply chains ever more entrenched, which, again, means the impacts of a trade war are very hard to quantify, particularly as indirect exposures could be significant – and not captured in the above graphic.

It is true that exports remain an important part of China’s economy, comprising almost 20% of GDP, as shown below. However, I think it is worth putting that in context. China is much less export driven than other countries or regions, being less than half as reliant as Europe, for example.

If we then look at the composition of China’s economic growth, we see that net exports have had no material impact for almost a decade now, as shown in the chart below. Furthermore, recent data shows that China is moving towards running a current account deficit, which suggests this will remain the case. The Chinese economy is well down the path of rebalancing from a high-growth, arguably unsustainable, export model to a lower-growth, sustainable, economy where domestic demand drives economic growth.

Again, a trade war is of course significant – but there will be no winners, and what the fallout will be is not clear cut. China will suffer, but so will all economies, not least Europe. The probability, and magnitude, of the impacts from a trade war are very hard to determine and constantly changing. But perhaps the impact on China isn’t quite as negative as the headlines, and indeed stockmarket moves, are telling us.


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