SOURCE: Atherton Lane Advisers, LLC

Atherton Lane Advisers, LLC

September 24, 2015 13:22 ET

Media Sensationalizes China's Economic Problems Says Atherton Lane Advisers

MENLO PARK, CA--(Marketwired - September 24, 2015) - Atherton Lane Advisers, LLC® ("Atherton Lane"), a leading investment management firm, addresses the widely spread misperceptions about China's changing economy in its most recent quarterly newsletter. Events in China have been cited as the drivers of the recent sell-off in the global equity markets. The fact that the Chinese economy is slowing as its very rapid growth rate declines is well known. There is no doubt that it has domestic challenges or that its government is extremely controlling, secretive, and opaque. However, Atherton Lane highlights that China's economic profile is still quite attractive. A new, very large middle class has emerged. The views in Europe, the U.K., and other Asian countries do not match the negative sentiment toward China which is very pronounced in the U.S. The negativity is especially true in New York City and Washington, D.C., which sensationalizes China's issues for media ratings or political leverage.

China's Economy Moving more Towards U.S. Model with Consumption Increasingly Important

Atherton Lane points out that consumer spending is now the main driver of the Chinese economy, and exports play an important, but diminished, role in the economy. China is moving its economic model to one modeled more like the U.S. in its self-reliance than export-oriented countries such as Germany or Japan. China leads the world in consumption growth, which averaged over 9% from 2009 to 2013. This consumption has been fueled by an incredible real per capita income growth rate of Chinese households. After decades of growth, income growth is still increasing more than 8% per year.

Services and Retail Spending a Bigger Part of Chinese Economy

Atherton Lane claims that what is confusing many observers is the shift in the Chinese economy as its period of huge infrastructure and real estate build-out slows. China has huge domestic resources and its citizens increasingly have middle-class incomes and middle-class desires for goods and services. China retail sales have slowed, but are still growing at a 10% year-over-year rate. While the global markets have focused on downticks in the Chinese manufacturing indicators, they have ignored the upticks in the Chinese service sector, which is now a larger economic component than manufacturing. Although negative manufacturing data for July made headlines, virtually unreported was the fact that the Caixin's Purchasing Managers' Index for the service sector hit an eleven-month high during the same month. As an example of consumer purchases, about 22 million new cars will be sold in China this year compared to 17 million in the U.S. Given rising incomes, the most popular new models are SUVs, just as they are for U.S. consumers.

Chinese Companies Displacing Many Western Goods and Brands

China no longer needs to import as many foreign goods, as its domestic companies have evolved to meet those needs. Atherton Lane indicates that one of the reasons that U.S. and European firms see the weakness in China sales is not because final sales in China are weak; it is because the Chinese are buying domestic brands. It is more difficult for Western brands to distinguish themselves, and while Apple and Nike may continue to enjoy a high degree of popularity, the novelty and prestige of many brands has diminished. It is not surprising that while Chinese total movie box office receipts are up 43% so far in 2015, Chinese productions are up 63% versus only 21% for imported movies.

Private Sector Companies Increasingly Dominate in China

Many Americans don't realize that Chinese state-owned and controlled companies have dramatically decreased in importance and now represent less than 20% of total employment. The Chinese private sector now employs 80% of the workers and is alive and well. Companies such as Alibaba, Tencent, and Xiaomi are innovative and rapidly growing. Private sector companies are far more efficient than the state-owned enterprises which benefits economic growth.

Real Estate Crash Never Happened

Atherton Lane points out that several years ago there was a great deal of discussion about the collapsing Chinese real estate market, and many U.S. commentators labeled it a bubble. The Chinese government was concerned about real estate price escalation, as well as inflation in general. Due to this, while western governments were stimulating their economies, China was limiting money supply growth. As a result, real estate prices staged an orderly correction over the past several years, and prices of new homes have begun to gradually climb again. The real estate crash did not happen. Chinese buyers frequently pay cash for real estate, and those who don't make large down payments. Most importantly, Chinese real estate prices trailed growth in disposable income. Real estate appreciation did not leave income growth behind as it did in the U.S. and Europe in the early 2000s.

Growth Rate Slowing But Actual Economic Increase Even Larger

The most important point to highlight is that because the Chinese economy has grown, to essentially the same size as the U.S., its growth rate will of course slow. The rumored "collapse" in Chinese GDP growth refers to a slowing from a 10% annual rate to perhaps a 5% to 6% annual rate. However, the 5% aggregate growth on an economic base that is now twice as large as it was in 2004 is the same aggregate incremental addition to GDP as 10% growth was on a base, which was half the size.

China has been the largest single driver of global GDP growth for the past fifteen years, and with a growth rate of about 5%, versus 2.5% in the U.S., 1% in Europe, and 2.4% in Japan, this profile is unlikely to change.

China is Big Beneficiary of Fall in Global Commodity Prices

While infrastructure, steel production, and old line economic activities have slowed, China's demand for oil and food commodities has not. The decline in prices of commodities is a huge bonanza for China and its consumers, just as it is for the U.S., Europe, Japan, and India. Any expectation that Chinese demand for these commodities will collapse is misplaced.

Chinese exports have been essentially flat for the past three years. Given weakness in Europe, Japan, and Latin America, which are China's major export markets, this is not surprising. Its imports have also declined over this time frame. It appears to Atherton Lane that it is a sign of falling commodity prices, because this is what China imports -- commodities.

No Devaluation -- A Change to a New Currency Regime

Atherton Lane disagrees that the move in the Chinese currency, which upset global markets in August, should be labeled a "devaluation." As a result, China has once again been called out as a currency manipulator. Since the renminbi has appreciated at a 0.8% annual rate versus the dollar for the past four years, this argument doesn't hold much water. Essentially, the RMB had been pegged to the dollar. During this time period the euro has fallen about 22% versus the dollar and the yen by 36%.

This currency readjustment is most likely a shift to pegging the RMB to a basket of currencies and not simply the dollar, similar to the approach which Singapore has used. The dollar peg has proved to be very expensive for the Chinese. The shift is also another step in the Chinese plan to internationalize its currency and have it accepted in the international currency basket by the IMF. It is perhaps not a coincidence that the RMB adjustment occurred immediately following an IMF visit. READ MORE

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Atherton Lane Advisers, LLC® is an independent investment management firm which provides financial advice and portfolio management to individuals and families.

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