Like it or not, China today is the world’s second biggest economy. Of course, it isn’t included in the G6, G8, G10 or G20 – or whatever – because this elite group has rules of its own on joining the club. Economic data produced by this giant nation is suspect (nothing new here) because government officials are rewarded, retained and encouraged to meet targets. You would too, I’m sure.
Empires come and go, and because of its geographic size and vast population (1.42bn currently), and although its international clout has ebbed and flowed, in theory it should be right up there at the top of the global pyramid. In its more recent history it has morphed from a hardcore Maoist communist state to a centrally planned quasi-capitalist behemoth. Whether you agree or not with this policy, is irrelevant.
What does matter is that its clout can make or break farmers and miners, designers and teachers – globally. Trade spat or not, war-mongering and the rest, its economy is on a very sound footing. Massive trade surpluses translate into huge foreign exchange reserves. Because nearly all borrowing is in local currency, exchange rates can be ignored and no foreign creditors need pacifying. Because the government has vast money flows, blips can be ironed out and people pointed in the right direction. Which is exactly what’s happening.
International media dwell on the risks inherent in shadow banking, debt and grand schemes such as 'Belt and Road'; they are powerless to change things. Instead we’ll concentrate on the here and now. China’s push for internationalisation of financial services continues, a part of its long-term plan – and with its deep pockets, best watch out!
The exchange rate matters, but not as much as you might think. Against the US dollar the yuan has changed tack a few times over the past 20 years. Sometimes complying with American demands (to achieve a greater good – 6.05 yuan per greenback from an original 8.25). Currently I feel this is not the case, and selective devaluation from a current 6.73 is one of the weapons in the People's Bank of China’s toolbox.
Interest rates matter, just as they do to us, but with zero external liabilities there’s a lot more leeway. Yields on benchmark 10-year government debt have swung between 2.5 and 5.0 per cent, both very manageable levels, several times over the past 15 years. These can be reduced from a current 3.45 per cent if needs be.
The CSI index of the top 300 A-shares in both Shanghai and Shenzhen has been volatile since listing in 2005. It started at 1000, soared to a record high at 5890 in 2007, then plunging to 1600 in late 2008. Subsequent swings and roundabouts have clustered between 2000 and 4400, with a spike to 5380 in 2015. Currently hovering at 4000, it’s at the expensive end of the scale. More importantly, as an investor, can you afford and stomach this rollercoaster?
Warnings about a Chinese slowdown due to President Trump’s trade policies have sent tremors around the world, especially in commodity-focused nations. So far, the price of foodstuffs has not been unduly affected, nor metals, and energy to a lesser extent – contrary to fears. The price of steel rebar futures in Shanghai rallied since December, suggesting steady demand from the construction industry. At 4,200 yuan per metric tonne, it’s well above the decade-long mean. Goes to show what money can buy.
