Scepticism over figures published by the Chinese government is nothing new – but Schroder Investment Management executives suggested at a forum in London last week that official mainland numbers are even further off the mark than many believe.
Current Chinese GDP growth is, in fact, close to zero, in stark contrast to the year-on-year figure of 7.3% for the third quarter and a GDP growth target of 7.5% for 2014, said Geoff Blanning, head of emerging market debt and commodities.
Combining the mainland’s provincial growth numbers typically exceeds the total national GDP number, noted Craig Botham, Schroders’ EM economist in London. “The authorities rush the data collection and do not have adequate infrastructure to collect it accurately," he said. "This is a country that is more than four times the size of the US, and their GDP data comes out two weeks before.”
The Chinese government is more concerned about unemployment and wage growth than headline GDP numbers, added Botham. It only publishes employment figures for the major cities, he said, but the International Monetary Fund, which is given access to the collected nationwide numbers, has told him that the labour market is tightening. If employment growth were slowing, there would be social unrest, he suggested.
Said Blanning: “If you look at other, more reliable indicators [than the employment figures] – including freight traffic, use of diesel and electricity demand – the economy is barely growing at all, close to zero, and this has been the case for the last year.”
Meanwhile, Schroders portfolio managers’ views are mixed on the wider picture for emerging markets. The US is ahead of other countries in staging a recovery, they said, but it’s not clear whether this should mean increasing or cutting EM equity allocations.
The base scenario of investor risk aversion to EM assets was proposed by Remi Ajewole, multi-asset fund manager based in London.
“Certainly there is uncertainty on the part of investors: factors such as low Chinese growth and a low oil price mean there is a preference for developed market equities, with investors in particular beginning to favour US equities,” she said. The result is not only that US equities are expensive, she added, but that they could become more so.
She pointed to recent quantitative easing programmes by the Bank of Japan and European Central Bank as evidence of the poor state of those economies rather than a reason for equity investors to allocate to them.
“We have a deflationary trend in the rest of the world [ex-US], which weakens commodity prices,” added Ajewole. “This leads to a preference for US assets and a preference for income.”
Ajewole even suggested that the EM equity premium – the excess return investors expect from EM equities to compensate for the greater risk – had now disappeared.
Allan Conway, London-based head of EM equities, sounded a more upbeat note on EMs by suggesting that focusing on DM equity allocations in a sluggish global growth environment was naive. He focused on the underlying growth story and the contribution that EMs will make to it next year, according to Schroders’ projections.
“Global economic recovery has been limited to the US; you don’t see it in Japan, and it’s not happening in Europe,” noted Conway. “People love to focus on the weakness of EM growth, but next year, EMs will be responsible for 65-70% of global growth. China will contribute about 10%.”
Another factor for investors to consider was growing dollar strength, said Conway, historically a bad thing for EM equities. “Historically there is a close inverse correlation between dollar and EM performance relative to the DM. So that will be a headwind for the next 12 months”.