Jim O’Neill who created the term BRIC and a China optimist indicates that China’s slowdown to its current 7.5 percent growth rate was well signposted by a sharp slowdown in leading indicators. Those measures, including monetary growth and electricity usage, are no longer flashing red.
Consumption measures such as retail sales have held up, and the current account surplus is down to about 3% of GDP, says O’Neill.
The three major indicators used by Chinese Premier Li Keqiang are also up. In August, on a year-over-year basis, power production increased 13.4%, which is the fastest rate of growth since June 2011. Rail freight volume is also up, rising 7.9%, the highest since September 2011. Bank loans outstanding climbed 14.1%. While bank loans are currently trending down, they are stabilising.
Taking the weighted average of the year-over-year growth of 40% power generation, 35% total loans outstanding, and 25% rail freight volume, the ‘Keqiang Index’ showed an increase of 12.3%. This is the fastest since September 2011 and solidly above the three-month average.
China is in the process of rebalancing its economy, moving from a reliance on exports to greater consumption and services. That’s why the focus in November will be to reform the hukou system, which was the primary means for controlling migration throughout the country. Chinese leaders will also be looking at fiscal reforms, a modest financial sector reform, environmental protection, and the one-child policy.
This rebalancing means that the ‘winning investments will be quite different than before,’ says O’Neill.
We believe this is positive for investors who selectively invest in Chinese stocks. As O’Neill puts it, ‘When a country is embarking on a significant compositional change to its economy, stock-pickers rather than index-trackers have the upper hand.’