‘Can’t gauge China economy through the stock market fall’

Mini Menon | Updated on January 19, 2018

Jahangir Aziz, Head - Emerging Asia Economics, JPMorgan

The silver-lining is China now has a much better monetary policy framework and forex regime, says JP Morgan’s Jahangir Aziz

China’s slowdown appears to be deeply entrenched as the Q4 GDP missed estimates and printed at 6.8 per cent. With this, China’s GDP growth in 2015 came at 6.9 per cent, slowest in 25 years.

In an interview to Bloomberg TV India, JP Morgan’s head of Emerging Asia Economics, Jahangir Aziz, says one should look at what is happening with the Chinese retail investor-driven equity market to gauge the world’s second largest economy. However, the fears of the impact of China slowdown on the rest of the world is genuine panic as the rebalancing act was trimming demand for commodities. The silver-lining is China now has a much better monetary policy framework, foreign exchange regime and fiscal policy management, he pointed out.

How bad is it looking for China? Analysts are expecting further slowdown. What is your outlook on China?

This idea that China will weaken further has been going on for at least since 2010. We have seen by every passing year, Chinese growth has been brought down. What is not being understood is that this not by accident, it is by policy design.

So if you look at the policies that have been undertaken since 2010, and lack of kind of stimulus that we have come to expect China to deliver in 2008 and 2009, which never really worked apart from briefly pushing up growth and then ending up with non-performing loans, I think there has been a significant shift in the way the policy makers in China see China.

They want the Chinese economy to slow down to a more sustainable growth rate. We know we are not there yet. This year probably the growth rate is going to slow down from 6.9 per cent to 6.5 per cent and in the next year it may slow down a little further.

Meanwhile, the Chinese economy is rebalancing. We are sceptical about the rebalancing. But if you do look at what is happening in China, there has been a significant amount of rebalancing. What is now being called as a new China — that is coming out. Policymaking which is where the big concern was last year where in August it was almost felt as if Chinese economy was in a free fall and there was not much of policy support. Much of that has changed over the last two months.

Now we have a much better monetary policy framework, a much better foreign exchange or exchange regime and definitely, and this is the biggest part, a much better fiscal policy management in China at this point in time.

It is so great to hear as everybody is so worried about China and there is absolute panic out there. But why are the fund managers panicking and the markets there shaved off $5 trillion in terms of wealth. And this year we have seen commodity markets continue to slump. So why are the fund guys so spooked by China?

There are two parts to that question. One part is that why did the domestic equity market really went into a shock in last year?

I think a part of that is if you look at how the equity market reacted, which by the way is very largely driven by retail investors in China sentiment-wise and unlike other equity markets, for example in India or elsewhere where institutional investors are the big drivers of the equity market.

Retail investors were caught up in this euphoria that Chinese stock market was once again going to go up and it did go up and you had stories about pretty easy margin financing and all of that stuff.

The rise that took place almost a 150 per cent increase in the Shanghai stock market that took place in the second half of 2014 was equally incredible as the decline that takes place in 2015.

So I don’t think one should look at what is happening with the Chinese equity market, which again is a very retail-driven equity market, to say that is the barometer of what is happening in the economy.

The second part of the story which is the impact of China on the rest of the world and where there is genuine panic.

And I think people should panic about it. It is true and real. The point I think we keep forgetting is that in this rebalancing that China is doing of slowing down growth from 10 per cent to 6.5 per cent, it is making China significantly less resource intensive than it was 4-5 years back, which means that the commodity demand or the demand for intermediate goods — China used to deliver to the world when it was growing at 10 per cent - is significantly less at 6.5 per cent not just because 10 has gone to 6.5 but because China itself has become much lighter.

And this is the part I think the commodity world has not really accepted and which is why the commodity market keeps getting downside surprise where China’s growth comes at 6.9 per cent. But that is not the kind of commodity support that one would have expected from the economy like China less than 5 years ago.

Published on January 19, 2016

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