Do the opinions of skeptics hold water when it comes to the Chinese economy?
If we are to believe the official reports from Beijing, the Chinese economy has barely contracted. In Q2 2015 the GDP growth rate was 7%, and in Q3 2015 it dropped to 6.9%. A major economy that grows at 6.9% is substantial by any stretch of the imagination. However, prior to the release of this official data, it was announced that imports declined by 20.4% (year over year) in September and that exports declined by 3.7% (YoY).
These numbers are confirmed by the sharp contractions of exports from emerging market countries such as South Africa, Zambia, the Democratic Republic of Congo, Venezuela and others. With commodity prices hitting multiyear lows, the oversupply in the market is causing a sharp contraction in demand as key market participants attempt to oversupply in order to maintain market share.
Commodities companies suffer as China demand wanes
The result has been nothing short of disastrous for energy and mining companies which are now having to shutter operations around the world. The closure of the Eland Platinum mine in South Africa as well as other mines in the DRC and Zambia are cases in point. Mining companies are looking to trim unprofitable sectors in order to decrease supply so that the equilibrium price will rise to meet demand.
In China's case, we are seeing sharp reductions in the demand for metals and energy commodities which is exacerbated by the low prices they are fetching on the market. Whether the Chinese data is correct or not is secondary to the fact that there has been a paradigm shift in strategic focus for China. The country has been moving away from an export-driven economy to a consumer-centric model where retail operations and the service industry are paramount.
The financial media is having a field day with the equities rout that rocked Chinese stock markets. Trillions of dollars were wiped out and the knock-on effect was substantial enough to delay an interest-rate hike in the U.S. To this day, the Fed, the Bank of Canada, the Bank of England and others are unlikely to raise interest rates for fear of what it might do to the global economy. A Fed rate hike would strengthen the dollar, which would make dollar-denominated commodities more expensive and therefore accelerate the declining demand given weak economic fundamentals. Weakness in commodity prices is being driven by decreased demand from China. Increasing those prices in the face of weak Chinese demand will cause a further contraction in overall demand. Similarly, a Fed rate hike would make the dollar more attractive relative to other currencies and cause a depreciation of emerging market currencies. This is something that the global economy can ill afford at such a precarious time.
The Chinese growth strategy: No fortune cookie needed
In China, investment increased by 10.3% (YoY) during the first nine months of the year. That figure – impressive though it may be – is the lowest for China in 15 years. But here's where it gets interesting: retail sales in China increased by 10.8% (YoY) in September – a seven-month high for the country. During Q3, income growth spike by 7.7% (YoY) – another positive indicator for the Chinese economy. This rebalancing that is going on in China is important to understand because it paints a different picture than the one the global economy is seeing. With less focus on manufacturing and production for the export market and more focus on retail and services, it is clear that China's rising middle class is the most important component of the country’s prosperity.
Already China has more people in the middle class than the U.S., granted that the country has a population almost three times the size. The 6.9% figure for GDP is dubious because the Chinese have assigned a 0.7% inflation figure to the dotted to make it "real." And in this vein, the nominal GDP growth of China has been severe – sharply lower than consumer price inflation. At the heart of this dilemma, cheap loans provided to producers during the global financial crisis allowed them to increase production to record levels. Massive consumption of commodities and huge stockpiles of inventories resulted, and now there is simply too much supply and not enough demand. China is now looking inwards to turn its fortunes around and that's precisely on what its growth strategy is based.
Brett Chatz is a graduate of the Economics and Management Faculty of UNISA University (South Africa) and he completed postgraduate studies at the University of Haifa. He is a published author (Serum), financial columnist and cricket writer. Chatz covers finance and stock markets regularly while providing his expertise to well-known firms such as Intertrader, UK CFD and Spreadbetting provider and other leading finance players.
