China’s Disruptive Transition Continues

Comments Off on China’s Disruptive Transition Continues
China’s Disruptive Transition Continues

China is the world’s second-largest economy. It’s a huge customer for Japan, Taiwan, OPEC, Australia, and South Korea, as well as a huge supplier to U.S. firms and an enormous target market for U.S.-based multinationals.

Over the past eighteen months, we’ve seen Chinese stocks soar and then crash. For those of us accustomed to OECD-based equity markets, it’s natural to assume that a country’s stock market reflects the condition of its economy, but that is not always the case.

What a stock market really should reflect is the consensus estimate of an economy’s future condition. More specifically, stock prices normally reveal future expectations for corporate profits.

However, the Chinese stock market includes many state-owned enterprises (SOEs) whose executives answer to bureaucrats in Beijing. The government views these companies as public policy tools. Everyone is happy if the SOEs make a profit, but profit is not the top priority.1

For this reason, Chinese stock prices tell us relatively little about the overall health of the economy, or even the specific enterprise.

The incredible 160 percent one-year run-up in Chinese stock prices that ended in June did not signal an economic boom. Nor does the ongoing decline signal an economic bust. The correlations aren’t just weak; they are non-existent.

If one relies on stock indexes, or even official government reports about China’s economy, it is no stretch to say, “they are flying blind.” Fortunately, we have diligent researchers at firms like China Beige Book, who do the hard work of gathering reliable data each quarter from thousands of companies in China and assembling it in a comprehensible form.

This data shows that China’s economy has actually been in good shape since the second quarter of 2014, when Chinese business leaders “stopped acting Chinese.”2

What does that mean? Faced with falling demand, they did the rational thing and stopped adding new capacity. Despite the availability of credit, they just sat on the sidelines. This was a good business decision. But it wasn’t consistent with Beijing’s expectations.

So what does the data tell us about the real Chinese economy and its implications for the rest of the world? To answer that question, we have to separate the Chinese economy into at least three components.3

First, Chinese real estate prices are heading toward stabilization. As we’ve reported on several occasions, China has indulged in a massive infrastructure boom, especially since the financial crisis, and this has resulted in “ghost cities” as well as highways and railroads to nowhere...

To continue reading, become a paid subscriber for full access.
Already a Trends Magazine subscriber? Login for full access now.

Subscribe for as low as $195/year

  • Get 12 months of Trends that will impact your business and your life
  • Gain access to the entire Trends Research Library
  • Optional Trends monthly CDs in addition to your On-Line access
  • Receive our exclusive "Trends Investor Forecast 2015" as a free online gift
  • If you do not like what you see, you can cancel anytime and receive a 100% full refund