How do you solve a problem like China?

This article is part of
Investing in Asia - October 2014

China’s transition from a rapidly growing emerging market country to a consumption-led economy that more closely resembles that of a developed nation has been well documented.

The country’s slowing growth is also a familiar story to investors, with GDP growth of 7.4 per cent reported in the first quarter of 2014, and remaining nearly flat at 7.5 per cent in the second quarter.

Reports suggest that when the Chinese government releases the latest figures on October 21 they will show a further decline in GDP growth in the third quarter.

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But in the context of the pace of growth of many Western market economies, including the US, UK and much of the eurozone where growth has been marginal or in some cases has stalled completely, 7 per cent plus growth in China looks impressive.

How to assess China

Earlier in October, the publication of one key measure of GDP growth indicated that the country has overtaken the US as the world’s largest economy.

According to estimates by the International Monetary Fund (IMF), in terms of GDP based on purchasing power parity China has passed the US. It reached $17.6trn, or the equivalent of 16.5 per cent of the world’s purchasing power adjusted GDP in 2014, slightly ahead of the US at $17.4trn or 16.3 per cent. The US remains the largest economy when measured by real GDP.

David Stevenson, head of product and business development at Baring Asset Management, observes: “China has received a lot of criticism from across the globe regarding the threat of slowing economic growth relative to the record growth rate it’s experienced over the past two decades.

“In the same breath to also move the economy to a more sustainable consumption led model... the two don’t necessarily go hand-in-hand in the short term, as there are frictional losses to growth as you transition any economy.

“In our view the government continues to manage this transition in a highly controlled and committed manner through various initiatives, including the recent liquidity boost. We view this as part of the government’s economic reform plans for sustainable growth rather than a sign of distress.”

Mr Stevenson refers to the recent move by the country’s central bank, the People’s Bank of China, to inject £50bn into five Chinese banks.

China’s shadow banking sector has come under the spotlight recently: it has emerged in response to demand for credit and has grown up around the far more regulated banking industry in the country, sparking concerns about the risks it presents.

Mr Stevenson supports the government’s action, however.

“We welcome the move by China’s central bank to inject £50bn into the banking sector as part of its ongoing strategy to move loans from the shadow banking sector into the official banking channel and a liquidity boost of this size evidences the government’s commitment to this initiative.”