From the highs of double-digit growth to the depths of its 2015-16 stock plunge, pundits and investors alike are trying to figure out what’s next for China. To help separate the myths from reality amid the economic and investment uncertainties, Benefits Canada asked experts who know the region best to discuss what they think about some of the misconceptions about China right now.
Myth No. 1: China’s stock plunge is another Asian flu waiting to happen
To understand why it’s not 1997 all over again, it’s important to keep a little perspective. “[The domestic Chinese stock market] isn’t like North America or western Europe. Corporations don’t go there to raise money,” says Stewart Beck, president and chief executive officer of the Asia Pacific Foundation of Canada in Vancouver. “Big corporates list in Hong Kong or New York. Shanghai investors are people buying and selling stocks like betting on the track. It’s indicative of problems in China but not problems in the actual economy.”
Read: Pension plans and the Canadian dollar dilemma
Others agree. “The Chinese stock market is very disconnected from the underlying economy,” says Arthur Kroeber, founding partner and head of research for investment research firm Gavekal Dragonomics in New York. That doesn’t mean there aren’t problems, however. Kroeber notes the Chinese government’s response to the crisis has created a lack of confidence and trust among foreign investors in China’s ability to keep its economy on a sustainable footing. “[The government] promoted a stock bubble and when it crashed, they panicked and stepped in. That indicates to me that the government really doesn’t get what markets are about,” he says.
Myth No. 2: China is on the verge of and economic crisis
“There is no crisis coming,” says Richard Sneller, head of global emerging market equities and a partner at Baillie Gifford in Edinburgh. “China’s role is not diminishing; rather, it continues to increase.”
Note that China’s economy has grown at just under nine per cent per annum for the better part of 30 years. And while the tailwinds that drove much of that growth (an increase in productivity and heavy infrastructure spending) are waning, Sneller isn’t expecting a collapse. Rather, growth will flatten. “We would be happy to see a GDP growth rate of five to six per cent a year,” he says.
Read: CPPIB to invest an extra $1billion in China
Far from declining, Craig Bodenstab, investment counsellor at Orbis Investment Management Ltd. in Bermuda, sees its influence expanding. “China’s policymakers have become more outward looking over time,” he says.
He suggests China’s One Belt, One Road economic strategy and the Asian Infrastructure Investment Bank signal an effort to expand its influence in the region. “These are positive steps forward for a country seeking a greater role on the world stage,” he says.
Myth No. 3: China will overtake the U.S. economy in the coming years
“Yes and no,” says Kroeber. China will rise to become the biggest economy but in size only. That’s not the only measure of power, however.
“If you want to sell something, you go to the U.S. It has a huge trade-driven economy. It has so many different dimensions,” says Kroebel. “It will be misleading to look at size alone.”
Myth No. 4: China’s social and environmental challenges will weigh on future growth
There’s no denying China’s transition to becoming the second-largest economy has come with a large set of issues, from heavy pollution to a shortage of clean water. But that’s changing, says Sneller. “A good proportion of new steel facilities and power stations are very efficient,” he notes.
Read: Dismal start to 2016 signals more challenges ahead
However, there’s another major issue: human rights and public perception. Beck says Canada needs to do a better job of addressing the issues and convincing Canadians that strong ties with China are important going forward. “People are legitimately concerned about human rights,” he says.
Myth No. 5: China is a geopolitical time bomb
That’s not the case, at least not with Donald Trump possibly poised to become the next president of the United States, says Sneller. And with China focused on being an economic superpower, Kroeber asks why it would compromise that by wading into military conflicts. Nevertheless, there are other issues. North Korea is a wild card as is Taiwan, which recently elected a new government. But overall, China is putting economic stability ahead of any geopolitical ambitions.
Get a PDF of this article.
Caroline Cakebread is a Toronto-based freelance writer.