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China’s economy- growing on shaky foundations

Hermes Emerging Markets

Home / Press centre / China’s economy- growing on shaky foundations

Gary Greenberg, Head of Hermes Emerging Markets
26 October 2016
Uncategorised

Widespread belief that China’s GDP growth is driven by an unsustainable expansion of credit, primarily to the real-estate sector, is well founded. The annualised growth rate of 6.7% for Q3 is in sync with the official target of 6.5%, but at what risk? Gary Greenberg, Head of Emerging Markets at Hermes Investment Management, takes a deeper look.

China’s credit impulse, a measure of new incremental lending, correlates strongly with the property market, which accounts for 25% of economic activity and is crucial to its growth. Many analysts reckon that real Chinese growth is about 5%, so authorities aiming to hit the official target are compelled to increase the supply of credit to the real-estate market, even if this funds loans that are bound to go bad (see figure 1).

Figure 1. Impulse buying: Chinese credit growth and property sales are directly correlated

gems-chart-1

Source: Jonathan Anderson, EM Advisors Group as at 18 October 2016

Why is the economy growing slowly? Looking beyond official statistics to the metrics  released by China’s trading partners, we find evidence of the secular slowdown being experienced by the rest of the world. This is driven by a decline in demand, upon which China’s old export-oriented model of growth was dependent. Growth in Chinese exports is negative, and has been all year (see figure 2).

Figure 2. Real export growth

gems-chart-2

Source: Jonathan Anderson, EM Advisors Group as at 18 October 2016

We see two Chinas: the old, and the new. The old is described here, burdened by an outdated growth model, sustained by debt and subject to reforms such as the country’s new state-owned enterprise restructuring fund. China’s nascent economy – featuring growing healthcare, e-commerce, and advanced manufacturing businesses – is what we perceive as its long-term source of growth, and is where we are invested.

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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Gary Greenberg Head of Hermes Emerging Markets Gary Greenberg joined Hermes in September 2010 in the Emerging Markets team. Previous to this, he was Managing Partner at Silkstone Capital and Muse Capital, both London-based hedge funds he co-founded and managed in 2007 and 2002, respectively. From 1999 through 2002 he was Executive Director at Goldman Sachs in New York and London, where he co-headed the Emerging Markets product for GSAM, and served on the global asset allocation and European stock selection committees. From 1998 to 1999 he was Managing Director at Van Eck Global in Hong Kong and New York, where he was the lead portfolio manager for International Equities and ran the Hong Kong Office. From 1994 through 1998 Gary was Chief Investment Officer at Peregrine Asset Management in Hong Kong, managing and supervising global and regional equity, plus fixed income funds. In the early years of his career he was a Principal of Wanger Asset Management in Chicago, where he co-founded and co-managed the Acorn International Fund, which grew to $1.4 billion under his tenure. Gary holds an MBA from Thunderbird School, a BA from Carleton College and is a CFA charterholder.
Read all articles by Gary Greenberg

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