Concerns about China’s slowing economic growth are overstated and the country has entered a ‘new normal’ phase, according to strategists.
China suffered its slowest quarter of economic growth in five years last week when it saw its economy expand by 7.3 per cent in the third quarter.
While the rate of growth is far above that of many western countries, the slowdown in the world’s second-largest economy has been a concern in markets, and will no doubt have influenced the International Monetary Fund’s (IMF) decision to cut its forecast for slower global growth.
The IMF said this month it expected the global economy to increase by 3.8 per cent next year, down from its July forecast of 4 per cent. As part of this forecast, it added China was likely to expand at 6.5 per cent by 2016 – far lower than its pre-crisis 10.5 per cent level.
But in spite of the weakening data, many economists said this simply matched their lowered annual growth expectations.
Guy Foster, group head of research at Brewin Dolphin, said he did not think slowing GDP expansion should be a big area of concern.
“We have always stressed that what matters about growth is the composition of it and never more so than in China,” he said.
“We expect in the coming few years to see a diminishing contribution to GDP from investment and export growth and a growing contribution from consumption.”
If this happens it is likely to lead to lower levels of GDP expansion as the numbers have been bloated by trade growth, which has been increasingly funded by debt.
Debt has been rising faster than GDP since 2008, showing that much of the investment is uneconomic.
Kerry Craig, global market strategist at JPMorgan Asset Management, agreed and expected lower growth to be the new normal for China. He predicts it will be at 6.5 to 7 per cent in the coming years.
Similarly, he does not think it is something to cause investors to bow out of China.
“Slower growth, even at its worst, is still miles ahead of the developed markets,” he said.
“For instance, the US market is growing at about 2.5 to 3 per cent.” He added many market participants treated economic data from China with “a lot of scepticism”.
Mr Craig said he was optimistic growth would slow without the country suffering an economic “hard landing” because the government will maintain control.
The Chinese administration has been focused on rebalancing its economy and moving away from investment. This leads economists and strategists to think the economy is moving towards becoming a more developed one.
“It is still an emerging market story, but investors need to change their approach to companies,” he said.
“The traditional areas of growth, like manufacturing, should not be their focus, but companies that are putting their energies into being clean and green should be considered.”
Last week, the HSBC flash China manufacturing purchasing managers’ index improved to 50.4 in the flash reading for October, up from 50.2 in the final reading for September.
But Markit, which releases the statistics, said domestic and external demand “showed some signs of slowing”, although both remained in expansion territory.
“Disinflationary pressures intensified, as both the input and output price indices declined further,” it added.
Aside from manufacturing, other sectors investors may need to be slightly wary of are retail and property. Retail sales came down slightly in September, growing 11.6 per cent year-on-year, compared with 11.9 per cent in August. New home sales fell 10 per cent year on year in the first three quarters, compared with a 24 per cent rise in the same period last year.
