Sorry Haters, Your China Hard Landing Has Been Postponed Again
It's a miracle of science that the talking heads of the financial press who have been predicting China's demise for the past 10 years are getting invited back to predict more of the same. Whatever they forecast, we can fairly safely assess that we know the outcome...they will be wrong about it again.
Aside from China's oversupply issues and shadow lending system and its housing bubble, China is the world's second most important economy, bar none. It is at least as important as the United States to Brazil; it is more important than the United States in all of southeast Asia. It is more important than the United States in Russia. Argentina has Chinese banks; almost as much as American ones. The housing bubble is a generational phenomenon as much as it is an economic one. Millions are leaving poorer rural areas and moving to cities. Also, due to the fact that many Chinese are more accustomed to buying houses for stores of value than they are buying IRAs and putting money into stock funds, real estate is always in demand and will be until China develops a serious, trustworthy product line of investment funds. That's a whole new world for China, and a massive opportunity for wealth management firms.
Meanwhile, the China hard landing is not upon us.
The Chinese yuan has yet to crack 7 to 1 as George Soros and Barclays both predicted.
Make that as much...
Rothman says that the increase is largely due to China's latest rules on controlling capital outflow. But just as important has been the surprising strength of the Chinese renmimbi against the dollar. It's been holding strong at 6.74 for weeks now, up nearly 3% against the dollar after shying away from 7 in January. The shorts lost again.
The direction of the Chinese currency is determined primarily by the strength or weakness of the dollar, rather than the health of the Chinese economy. In 2016, when the dollar index rose 3.6%, the remmimbi fell by 6.4% against the dollar. In the first half of this year, the dollar index weakened by 6.4%, helping the renmimbi gain against the greenback.
Rothman says that capital outflows may accelerate a bit in the coming months as Chinese tourists head abroad and parents pay tuition for children who study overseas. Despite that flow, he expects the dollar to remain "fairly soft" against the Chinese currency.
The China consumer story isn't over yet. Part III is in the works and Part IV is being scripted.
China's economy in the first half showed better than expected growth, at nearly 7% versus forecasts of 6%. Incomes are rising as is consumer spending, and corporate earnings at new industry juggernauts like Baidu surprised to the upside.
"The Chinese economy delivered many surprises in the first half of the year, disappointing -- yet again -- the pundits who predicted a hard landing," says Andy Rothman, a Matthews Asia investment strategist and an old China hand who has lived and worked there for 20 years.
China’s central bank added another $46.3 billion to its coffers in the first half of the year, putting the People's Bank of China's foreign currency reserves to $3 trillion. To put that into perspective, China has more money sitting in reserves than Brazil's entire economy produces annually.
Strong wage growth, low household debt, mild inflation and consumer optimism resulted in real retail sales growth of 9.3% in the first half of the year. U.S. real retail sales growth was 2.3% over the same period. Worth noting, spending by Chinese consumers was equal to only 22% of U.S. retail sales 10 years ago. In 2016, it rose to the equivalent of 87% of American consumer spending and is likely to beat the U.S. within a decade. No wonder no one can truly beat up on China.
We will have to reserve that disdain for the Russians.
Back to the matter at hand...China's per capita urban household income rose 6.5% in the first half, up from a 5.8% growth rate during the first half of 2016.
The rebalancing of the Chinese economy continues a pace, with consumption accounting for 63.4% of GDP growth in the first half of 2017, up from a 44.7% contribution during the same period in 2010, Rothman says.
"The consumer story should remain healthy in the coming quarters, and drive an increasingly larger share of China’s economic growth over the coming years," Rothman predicts. Fox Business News, CNBC and Bloomberg need to talk to Rothman instead of the usual chorus of China naysayers.
China's Piggy Bank Is Way Bigger Than Yours*
China's central bank has $3 trillion sitting in reserves...at least. That means it has more money tucked away to defend its currency and economy from crises than the entire GDP of these significant economies:
UK GDP: $2.6 trillion
France GDP: $2.46 trillion
India GDP: $2.3 trillion
Italy GDP: $1.85 trillion
Brazil GDP: $1.79 trillion
Canada GDP: $1.53 trillion
Russia GDP: $1.2 trillion
Australia GDP: $1.2 trillion
Mexico GDP: $1.04 billion
Saudi Arabia GDP: $646 billion
and even...
Sweden GDP: $511 billion. Sweden!
I think the said predictions are driven more by political bias than economic acumen.
