Why Slower Economic Growth in China is a Good Thing

Aberdeen Standard's Nicholas Yeo says that slower Chinese GDP growth is a positive development - and good news for investors

Emma Wall 17 July, 2018 | 2:38PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Aberdeen Standard's Nicholas Yeo.

Hello, Nicholas.

Nicholas Yeo: Hi.

Wall: So, yesterday we had some figures from China, Chinese GDP. And Chinese GDP has come down over the last couple of years. And my question to you is, how much of this is intentional by the Chinese government and their reforms and the measures that they are putting in place, and how much of it over the last quarter is to do with the trade war rhetoric?

Yeo: Okay. I think the GDP decline over the years, to a certain extent, it is engineered by the government notwithstanding that the global economy hasn't been ticking that strongly as well, hasn't been going that strongly as well. So, that has an indirect impact on the Chinese economy.

But there's a high element of – a big element of the government trying to reduce the growth rate so as to improve on the quality of the growth because over the last few years we have credit fuel GDP growth which is not healthy and what we have seen in the last quarter is very much the result of the deleveraging rather than the trade war. I mean, trade war is only at the beginning.

It would not be reflected so much in the second quarter results. A lot of it, I think, is down to the deleveraging that we are seeing in the economy, and that is something that we are positive about because the government is definitely doing something to rein in the extra credit there has been or the credit boom that we have been seeing in China.

Wall: I suppose that's quite a contrarian idea for investors, that the idea of a slowing economic growth is actually a positive thing for investors. But you are saying it shows that the government is actually taking control of the economy.

Yeo: Yes. I think the government has a number of levers as well. It is still a closed capital account. So, when it comes to managing financial risk or financial crisis, I think the Chinese government has – it has more leeway, has more levers to contain that as compared to a more open economy.

So, that is definitely advantageous the way that China has set up from the beginning. Of course, we want to see the economy, the capital market open up and reforms coming in to improve the efficiency of the economy. That's all in the making, but it would take time. The more important thing is that the government is taking control to make sure that we don't run into a severe kind of risk in the economy. And I don't know. There it's about the quality of the growth.

It's not so much about just a GDP number. And quality is what the government is going for on many fronts, from the reforms at the company level, from the overall economic growth structure, right down to even investors – capital market reform, making sure that the capital market is up to a certain standard that the pension funds can invest domestically in China.

Wall: And I suppose also 5%, 6%, 7% is incredible growth when you compare it to that of the developed world. So, even though the economy is slowing, it's still a nice pace. The question there is, how can investors benefit from this growth, because it's not always easy to equate the economic prospects with the stock market prospects, is it?

Yeo: Yes. I think if you look at the overall Chinese market, there are many ways to get access to the Chinese market. You can go directly into the A share. And over the last few years, we have seen an improvement in the governance standards in A share and that has given investors, either your foreign or local, a slightly wider pool of investable companies, investable in the form of quality companies. So, that is, I think, a great step forward.

So, at a company level, this is where we want the investors to focus on. On the stock-by-stock basis, whether they have improved, whether companies are more progressive on the governance front, I think, there are a lot of exciting stories on that front, not so much on the business. I think the business, yes, it's trotting along.

The overall economy is much more stable now. But if you drew down further and look at individual companies, they have become a lot more investable because they are adopting better standards because they want to woo the foreign investors as well as the government wants the overall quality of the companies listed in China to improve.

So, I think that is something that is definitely driving the interest in Chinese investments, not so much the GDP, but I think for us, it's very much down to the companies' improvement that we are seeing on the ground.

Wall: Nicholas, thank you very much.

Yeo: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
abrdn China A Share Sus Eq I Acc USD13.14 USD-1.04Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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