China’s stock market may be cratering and bringing the rest of the world with. However, concerns about the Chinese economy are largely overblown, according to economists from Standard & Poor’s, and the Chinese renminbi (RMB), while falling hard against the US dollar (USD) has dropped only marginally against the basket of currencies the Chinese authorities are now pegging.
In a January 5, 2016 teleconference, the S&P economists explained the reasoning behind those conclusions, which run counter to prolific concerns today about a “hard landing” for the Chinese economy and significantly more devaluation in store for the RMB.
On the exchange-rate front, Paul Gruenwald, S&P’s chief economist, Asia Pacific, noted the International Monetary Fund (IMF) announcing it will include the RMB in its special drawing rights (SDR) currency basket later this year. More recently, Chinese authorities said they will peg the RMB to a basket of currencies rather than just the USD. Those moves combined with the Chinese authorities’ devaluation of the RMB last summer and other unexpected moves have prompted jitters among market participants, including corporates viewing China as a source of supplies and growth.
“A lot of action in the market is coming from uncertainty. The Chinese authorities are moving up the learning curve in how they explain their actions, including their intervention policies and whether they’re pegging the RMB to a basket or not,” Mr. Gruenwald said.
As a result of that uncertainty, capital outflows from China have been estimated at upwards of $1 trillion in the last six moths of 2015. In addition, many exporters in China are reportedly no longer selling USD into local markets for RMB. As a result, the RMB’s value against the dollar has plummeted to 6.2 from 6.58 last year, a drop of 6%.
“So there’s been quite a bit of depreciation against the dollar,” Mr. Gruenwald noted, “But if you take the Chinese authorities’ for their word that they’re pegging the RMB against a basket of currencies, the RMB has moved less than 1%.”
Mr. Gruenwald said Chinese leaders must decide whether to spend more reserves to support the RMB or rely on market forces, a process they appear to be still working through.
In terms of the Chinese economy, S&P views hard landing fears as overblown, Mr. Gruenwald said. For one, too much importance has been given to China’s plummeting stock market, since mostly individuals are now trading in the relatively closed market, and it’s a poor barometer for economic activity.
In addition, while investment has slowed in many sectors, including property, steel and solar, the government has sought to ramp up infrastructure spending, including extending credits to state-owned enterprises and local governments.
“The investment was adding about 4%, maybe 5% to growth in the boom years and now it’s probably closer to 1%,” Mr. Gruenwald said. However, he added, consumption, representing roughly half of growth, has held up well, whether retail shopping, outbound tourism or corporate purchases such as planes. S&P estimates such spending adding 4% to growth annually, which along with 1% from investments and 1% or more from net exports totals upwards of 6.5% overall growth.
“That doesn’t speak to high quality growth, and we’ve suggested China seems to be sacrificing the national balance sheet to support GDP growth,” Mr. Gruenwald said, “But there is still policy space to support growth …. We don’t see much downside to the Chinese growth story.”
In fact, S&P sees a positive if not stellar growth for much of the world in 2016. Paul Sheard, chief economist at S&P, said concerns about falling oil prices are somewhat misplaced, given the lower energy costs for individuals and companies.
“We think falling oil prices will have positive effects for many economies,” Mr. Sheard said.
He added that the US’s still accommodative monetary policy combined with approaching full employment provides a “fairly good mix” that should generate economic growth a bit higher than 2.5%. In addition, most economies in the Eurozone are now posting positive growth in the wake of aggressive, if belated, quantitative easing, prompting 2016 European Union growth of 1.5%, “maybe as high as 1.8%,” Mr. Sheard said, adding Japan’s growth will likely pick up to around 1%.
Mr. Sheard said that China represents the greatest source of economic concern in 2016, as the government seeks to manage the economic slowdown, reduce the excess credit from the boom years, and make the economic more consumer than export driven—“the trifecta.”
“We wouldn’t get too negative on China just yet, since it has a number of things going for it, including significant economic development potential still, a track record of achieving results, significant policy ammunition, and a game plan for getting through the next few years,” Mr. Sheard said. “So we think China will slow but not shift the dial significantly on global growth.”