21 October 2016
An IKEA store in Hangzhou, China. Mainland consumers continue to splurge despite an economic slowdown and stock market woes. Photo: Xinhua
An IKEA store in Hangzhou, China. Mainland consumers continue to splurge despite an economic slowdown and stock market woes. Photo: Xinhua

Why we should remain optimistic about China’s economy

China is facing challenges in economy and finance, but we think it’s only part of the story. Although the economy is going through turbulence, a recovery in the real-estate market, increasing consumption by the middle class and growth in the services industry will help stabilize the situation.

While the manufacturing sector is under great pressure, positive news related to service industries hasn’t received much attention.

The service sector’s contribution to China’s gross domestic product has risen to 48 percent in 2014 from less than 40 percent in 2000.

Meanwhile the purchasing managers’ indexes (PMI) for manufacturing and service sectors are showing opposite trends, indicating that the latter has been quite resilient.

Another indicator is electricity usage in the service industry. The power consumption for service sector has increased at 7 percent monthly pace in the first seven months of the year. In contrast, power consumption for industrial firms fell sharply.

The rise of the middle class is the reason for the expansion of the service industry. President Xi Jinping’s anti-corruption drive may have led to a deceleration in retail sales growth, but it hasn’t really altered the trend in Chinese consumer behavior.

Strong online shopping and movie box office sales figures, as well as other indicators for middle class consumption, continue to record strong growth.

Also, we have been emphasizing in the past few months that China’s property market is stabilizing. Inventory levels in major cities have been falling while transaction volumes and prices have been posting moderate growth.

If such trend continues, developers are likely to initiate more projects in the second half of 2016. As investment in home construction accounts for about 15 percent of total fixed-assets investment, a recovery in the construction industry will help stabilize the overall investment picture.

As for the country’s investment in infrastructure, the “One Belt, One Road” initiative will be a key component in Xi’s game-plan. The government already injected about US$100 billion into two policy banks, enabling them to lend for related projects.

We expect China to adopt further monetary policy easing. Presently, the real lending rate is still at a high level and a large amount of money is stuck as bank reserve deposits.

Further reductions in interest rates and reserve requirement ratios will boost liquidity and help companies lower their cost of borrowings and loan servicing.

As for stock market investors, they have a chance to start over again following the adjustments in equity prices over three months since July.

One should consider putting money in sectors that will benefit directly from the nation’s structural reforms.

This article appeared in the Hong Kong Economic Journal on Nov. 3.

Translation by Myssie You

[Chinese version中文版]

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Chief Asia Market Strategist at JP Morgan Funds

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