4 Myths about China’s Economy Debunked; Water Industry Well Positioned for Growth

Earlier this month, China’s credit-rating outlook was lowered from stable to negative by Moody’s as it highlights the country’s surging debt burden and questioned the government’s ability to enact reforms. This came days after China’s central bank resumed its easing cycle by cutting the reserve requirement ratio by 50 basis points.

And during the weekend, China announced a 6.5 percent to 7 percent expansion goal, down from an objective of about 7 percent last year. This is the first time since 1995 that the Chinese government has announced a target range for economic growth. Is China really losing steam? Or is it misrepresented by sensational news?

The Chinese Economy Is Misunderstood

While China has become the epicentre of investors’ concerns about the world economy, investment strategists, such as Andy Rothman of Mattews Asia, says that the Chinese economy is “widely misunderstood”.

The main reason for the misunderstanding is a lack of holistic approach. In other words, investors tend to consider one particular isolated parameter at a time, without analysing China’s economic system as a whole. Another mistake is to ignore China’s idiosyncrasies and directly apply the rules and standards typical of western economies to the Chinese economy, which is fundamentally and structurally different.

4 Myths about China’s Economy You Need To “Unbelieve”

1. Close To 300 Percent Debt-To-GDP Makes China The Next Subprime Crisis

While China’s debt-to-GDP ratio is high, hedge fund managers believe that a very sizeable part of the debt is double counted. A large part of debt is given by the government banks to the government companies to finance infrastructure development, i.e. this debt is internal. Think of it as an internal financing within a large corporation. In fact, some of this “debt” is caused by the government’s direct investment in infrastructure.

Unlike the US credit crunch of 2008, China’s bank recapitalization is not forced or urgent because of a state semi-monopoly savings where deposits are stable. Servicing of those “debt” is actually cheaper than what the market thinks.

2. Capital Outflow And Shrinking Reserve Is A Major Worry

The market seems to believe that capital has been fleeing China, and the authorities are forced to sell foreign currency reserves to prop up the falling yuan. Yet, such outflow could be attributed to China seeking to unlock and allocate its reserves to invest in real assets around the world.

3. China’s Growth Engine Has Stuttered

The slowing growth of China’s economy is a fact but it is not an abnormal situation. Given the size of China’s economy, if it continues growing at ten percent per annum, it would account for up to 75 percent of the world’s economy in less than 30 years! That kind of growth does not make sense.

4. Stock Crash Indicates A Weaker Economy

China’s equity markets, despite their enormous size, are still in their infancy stage. Unlike in the US, most of the economy is still financed by bank capital rather than equity capital. Hence, stock exchanges are still largely detached from the real economy.

Investors’ Takeaway

1. Franklin Templeton: China’s Stock Market Will Pick Up

The Shanghai Stock Exchange Composite (SSE) has dropped 24 percent this year, making it the worst performer among 93 global equity indexes. There are concerns that capital outflows will accelerate and earnings will deteriorate as the economic slowdown deepens.

According to chief investment officer at Franklin Templeton, SSE is expected to rebound as much as 20 percent in the short term as economic growth picks up and yuan volatility decreases.

2. HSBC: BUY China Everbright Water