August’s abrupt sell-off ensured that the summer holidays were not quite as relaxing as many market participants had hoped. Much has been written about the causes and influences of the extreme volatility, but it is clear that fundamentals played a significant role. Developed world stock markets suddenly appeared to acknowledge something that other asset classes have been concerned about for some time – in particular, that the fundamental health of the Chinese economy is nowhere near as robust as had hitherto been implied by valuations.
That the Chinese economy is slowing should not have come as a surprise – recent quarterly growth figures have lacked credibility when compared with other real economic data. Even the Chinese Premier, Li Keqiang, allegedly mistrusts the country’s official economic statistics, preferring to track growth by looking at real data. The Li Keqiang Index, as it has become known, tracks growth in outstanding bank loans, electricity production and rail freight volumes, and currently shows a reading of just 2.5% year-on-year. It last visited that level in November 2008, just after Lehman collapsed.
Of course, as a long-term fund manager, I am more concerned by the long-term outlook for the Chinese economy and what that means for the global economy as a whole, than I am about its current predicament. I have been consistently cautious in this respect for several years and I see no reason to change this view yet. Indeed, the number of reasons to be cautious about China is increasing.
The transition from an economy relying heavily on fixed asset investment to one which more closely resembles the Western, consumption-based economic model, has been achieved before by other developing economies. It is a very long road, however, and one with many bumps in it. In the case of China, the transformation also requires a different political approach but recent interventions in the stock and currency markets suggest the authorities are struggling to let go of the controls.