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China: What's Next? Valbury Capital
News & Opinion

News & Opinion

China: What's Next?

China: What's Next?

The Chinese Communist Party Politburo members recently released a statement via its state controlled news agency Xinhua, intended to placate tumultuous markets and turn around dejected sentiment. The Chinese financial markets are among the worst performing in the world this year, and it could worse.

The Shanghai Composite is down around 20% this year, despite the National Team’s efforts to prop up indices by buying heavyweights with state funds. Corporate bond defaults have continued to rise as new debt issuances require higher coupons, further straining excessively leveraged corporate balance sheets. On August 24th the People’s Bank of China reintroduced its counter-cyclical factor to better control currency fluctuations, however, the renminbi has still depreciated around 10% against the dollar so far this year. In early April the USD/CNY exchange rate was around 6.27, since then the Chinese currency has depreciated precipitously, recently falling to 6.97. Investors are fixated the USD/CNY 7 mark, with 7 being the implied red line that the central bank will not cross.

A popular professor at the prestigious Peking University recently published a controversial article criticizing what he claims is a misconception about economic growth in the country. The professor takes issue with the supposed uniqueness of the Chinese economic growth model, which is actually just a repetition a common economic growth model previously used by developing economies that is reliant on property and infrastructure investment. The professor, Mr. Zhang, refutes the misconception that China’s economic growth has come from a strong state sector, instead he cites statistics showing that economic growth is dependent on a strong private sector, and that state- owned companies actually prove to be a drag on GDP per capita growth.

There are even questions about the actual size of the Chinese economy, and measurements become wholly unreliable when the data is falsified. The Head of China’s National Bureau of Statistics, which is responsible for reporting economic data in the country, was convicted of corruption and bribery last year. Furthermore, many local government officials have openly admitted to falsifying economic data, which is used to compile national GDP numbers. But even if the quality of the data is overlooked, the reporting of the data is in a format inconsistent with international norms. China’s GDP reports have no expenditure breakdown, and the reports are done year on year and year to date, as opposed to quarter on quarter seasonally adjusted and annualized, the latter being the norm. The actual size and growth of the economy is hard to pin down.

However, investors can all agree that China’s economy is the second largest in the world and that it’s slowing. As the government tries to avoid a hard landing, in the days ahead investors will be watching to see if the USD/CNY rate breaches 7, and if global volatility spikes as a consequence.

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