Smith says: “We’ve been far less dismissive of president Trump’s protectionist rhetoric than Western markets appear to be. And in his inaugural address, Mr Trump proclaimed that ‘[America] will follow two simple rules: Buy American and hire American’.
“But other emerging markets are far more vulnerable to American protectionism than China, which has already gone a long way towards reorienting its economy towards more internal drivers – the services sector accounts for 52% of the economy, and that is highly likely to be an underestimation, given the poor collection of data from the private sector.”
That’s not to say that China is without problems, he said, citing its very rapid accumulation of debt and an acute drop in productivity growth.
Chinese fortune
“But we believe that there are reasons to be more optimistic on the country’s prospects this year than many out there envisage,” said Smith.
“Our ‘nowcast’ of Chinese growth, which attempts to assess the true rate of economic activity from data less susceptible to data errors or even manipulation, suggests that the downturn troughed in Q4 2015 and reaccelerated throughout last year.
“Although we expect policy tightening to lower growth again at the margins, the important point to note is that we believe the bulk of the slowdown is behind us, and the underlying rate of growth has already fallen to within the range at which it is likely to stay for the next 10 years,” Smith said.
“Although the rapidity of debt accumulation is alarming, it is concentrated in the state-owned sector and issued by state owned banks. This presents policymakers with far more levers to pull in order to avert any dislocating impact on monetary institutions.
Other reasons to remain positive on China include: “The reorientation to a consumer-driven economy looks well advanced. The service sectors are booming, and far less debt is required for the expansion of these capital-light industries,” Smith says.
“Consumption has been more resilient than expected during the investment slowdown – largely due to the strength of job creation in the service sector. In addition, employer surveys also point to an improvement in household income.
“Concerns about capital outflows are repeatedly overblown. We estimate that 70% of net outflows in 2016 were due to benign or even positive forces, such as an increase in overseas acquisitions by Chinese firms or the repayment of dollar-denominated debt, which diversifies the asset base and strengthens financial soundness respectively,” he said.
