One way the government is trying to achieve stability is by clamping down on local corruption, combating pollution, addressing property rights and health care in rural areas, and relocating industry to China’s interior to spread economic opportunities around the country.
Another way is by promoting the country’s service sector. “Services have slower productivity growth and need more bodies, so they employ more people over time than manufacturing,” Rutledge says. “They will have to move a lot of people into cities for these service jobs, which generally require more education than manufacturing jobs. So China is going through a lot of changes while the economy is slowing from 10% to 7%.”
In other words, China is trying the change the tires on a vehicle that's decelerating from 80 to 60 miles per hour. And doing so implies a sense of trust that the strong central government knows what it’s doing and can keep things on track. At the government’s Third Plenum policy setting conference last November, it established a blueprint for 2020 comprising 60 reforms in 15 major areas, including the development of a market-oriented economy, greater support for private-sector economic growth and less control by the central and local governments. It also includes social measures such as relaxing its one-child policy.
Free marketeers usually decry interventionist policies from central governments. But at least for now, most observers have nodded their approval for the Chinese Communist Party’s version of capitalism.
Eye On Consumers
Nick Beecroft, a Hong Kong-based portfolio strategist with T. Rowe Price specializing in emerging markets and Asia, says China’s credit growth is concerning because the vast interlinking among various industries means there’s a likelihood some of these debts could go bad and ripple through the economy.
Nonetheless, he says T. Rowe Price’s base case scenario is that the government has enough knowledge and policy levers to pull to gradually work their way out of this situation. “The massive difference between China and the West is that in China the government has control over everything, including the banking system, and they have a huge amount of money at their disposal so there’s lots they can do to control this,” Beecroft says.
But while he believes the worst-case scenario would be very serious for China, he doesn’t believe it would cause a massive global financial meltdown. “Almost all of the debt in China is local-currency-denominated, and most of it is held by domestic investors, so there’s less external pressure than there was during the global financial crisis.”
Commenting about the T. Rowe Price New Asia Fund, which as of the end of February had China as its largest country weight at 21% of the portfolio (with Hong Kong second at 18%), Beecroft says the fund is heavily underweight Chinese banks because they don’t have enough earnings visibility as the country moves through its credit cycle. “We try to avoid sectors we think could be most at risk from a macro slowdown or from the credit cycle,” he notes.
Beecroft says he’s focused on sectors he believes have strong tailwinds––Internet-related companies, those tied into the broad consumption theme and clean energy companies in the areas of gas distribution and wind power.