The bulls and bears were once again given bait in the ongoing debate about the validity of Chinese economic data after it reported its weakest GDP growth rate since 2009. The 6.9 per cent figure for the third quarter has come under sharp scrutiny given the significant role China plays in the global economy.
The ripple effects of China's transition away from the investment-led, commodity driven economic growth of recent years hit the UK this week as Tata Steel closed three steel plate mills, resulting in the loss of 1,170 jobs.
The closures come at a time of tough conditions for commodities, prompted by a less ravenous appetite by China for steel, leading to a glut of supply and thus cheaper prices. The move by Tata comes shortly after Thailand-based Sahaviriya Steel Industries announced the closure of its Redcar iron and steel works.
According to the World Steel Association (WSA), China produced 25.6 per cent of the world's steel in 2004 and used 28.3 per cent. But in 2014, it produced 49.4 per cent but only used 46.2 per cent. The WSA said markets other than China would drive new demand but that "nobody can predict exactly when or where".
Steel demand is important for the likes of London-listed iron ore producers Rio Tinto (RIO) and BHP Billiton (BLT) as well as commodity-linked companies, such as Driver (DRV) and Hargreaves Services (HSP), both of which were impacted by the Redcar closure.
The fact China is using a smaller percentage of steel produced globally is perhaps intuitive given its desire to create a more consumer-led economy. But it is still by far the biggest steel producer globally so is the third quarter growth rate actually too conservative - allowing China to present some positive surprises down the line - or is it too optimistic? And how is the rebalancing of its economy progressing?
Russ Mould, investment director at AJ Bell, said underlying metrics suggested the real growth rate could be "nearer 3-4 per cent" based on factors favoured by the Chinese prime minister Li Keqiang (see chart, below).
"Credit growth still looks promising, but freight shipments and electricity demand growth look to be sagging, so the so-called Li Keqiang index does raise a few questions," Mr Mould said.
The reason China matters so much, according to Mark Burgess, chief investment officer, EMEA, at Columbia Threadneedle Investments, is that it has been "such a significant driver of marginal [global] growth". He said the impact of China's reduction in credit-fuelled spending had already affected commodities, including oil and industrial metals, and thought this curtailing of activity in the country would mean China slowing to "perhaps 5 per cent GDP growth per year".
Key metrics may suggest weaker growth
Russell Investments' senior investment strategist, Wouter Sturkenboom, said the issue of bad debt in China was a problem for him - it hit a record 41.06 per cent of GDP in 2014, according to Trading Economics - and that the headline third- quarter GDP number "looked out of line with more high visibility partial indicators". But he believed there was "nothing in the numbers to hearten the bears" and that data showed rebalancing was on course.
"Indeed, market reactions to the effect that 'retail sales were the only highlight' and 'retail sales is holding up the data' can be seen as a little carping," he said. "After all, realigning the economy towards consumption and away from public capex was supposed to be a key objective."
Andy Rothman, investment strategist at Matthews Asia, said "for the first time ever", services and consumption combined accounted for more than half of China’s GDP, at 51.4 per cent, up from 41.4 per cent a decade ago. This could prove a boon for consumer stocks with well-established and growing links in China, such as Burberry (BRBY) and Unilever (ULVR).
"This mitigates weakness in manufacturing and construction, and, if this rebalancing continues, it should mean that macro deceleration will be gradual," he said.
Mr Rothman added "unprecedented income growth is the most important factor supporting consumption" given real per capita disposable income rose 7.7 per cent in the year to end-September and a whopping 137 per cent in the past decade.
This suggests even if manufacturing and construction continue dropping off, the services and consumer sectors appear well underpinned.
