San Francisco, CA, February 4, 2014
—Matthews Asia today published a white paper titled, “China—Separating Fact from Fiction
.” The paper addresses some of the major economic challenges China is now facing as it transitions to a more balanced structure focused on consumer spending, services and productivity.
According to the paper, misconceptions linger with regard to China’s growth, indebtedness and ongoing reforms which have led to incorrect assumptions regarding a potential deeper economic slowdown and more serious credit crunch.
Matthews Asia’s investment team sees that careful consideration of China’s credit architecture, banking system, productivity measures and recent moves toward economic liberalization and transparency reveal that China is more likely on a measured and sustainable path of economic growth that is being supported by a serious attempt to engineer a slowdown and implement step-by-step reforms.
The two-part white paper seeks to clarify issues related to the profile and sustainability of China’s economy and also discusses some of the key challenges that lie ahead. The paper focuses on key issues such as: investment and over-investment; government debt; expanding the bond market and diversifying financial risk; productivity growth; banking and shadow banking; taming the “credit dragon;” institutional transparency; liberalization of the financial sector; and the vast challenge of transitioning China toward more complex, higher value-add economic activity. The paper also takes a look at some of the more recent intriguing initiatives being undertaken to inject greater transparency and market forces into economic activity.
Key highlights from the paper include:
China is currently undergoing a measured slowdown and is beginning to implement policy decisions that will support a new phase of growth.
China’s economy is becoming increasingly centered on urbanization, rising education levels, higher productivity and delivery of new services. These are attuned to the complex needs of sophisticated urban consumers.
While there are some concerns over the pace of credit growth in China, particularly at a local government level, the absolute level of debt in China remains manageable and the government has started to introduce tightening measures.
While not without risks, a closed and self-funding banking sector in China makes it less vulnerable to financial stress and the ability exists for the central government to intervene if necessary.
Recently announced policy reforms, while ambitious, are encouraging and provide an indication of the level of commitment being made to improve the overall quality of growth in China’s economy.
Robert Horrocks, PhD, Matthews Asia Chief Investment Officer comments:
“Given the remarkable transformation of the Chinese economy over the past three decades, we see the decision by the Chinese government to rebalance the economy as a very necessary step. However, a combination of slower growth, rising debt concerns and liquidity issues in the banking sector contributed to rather negative sentiment towards the country in 2013. We, therefore, felt this was an opportune time to take a deeper look at the Chinese economy and address some of the concerns that have been raised over the past year or so.
“From our analysis, we see the Chinese economy as strong enough to withstand many of the headwinds it now faces and more than capable of moving along a sustainable path of moderate economic growth supported by step-by-step reforms. In addition, while much attention has been placed on China’s macroeconomic outlook, it’s easy to forget that at a corporate level there are many healthy companies successfully navigating their growth path at a micro-level. With this in mind, despite the country undergoing an important economic transition, we see no reason to believe that it will not remain one of the key investment themes over the coming year.”
About Matthews Asia
At Matthews, we believe in the long-term growth of Asia. Since 1991, we have focused our efforts and expertise within the region, investing through a variety of market environments. As an independent, privately owned firm, Matthews is the largest dedicated Asia-only investment specialist in the United States. With US$25.9 billion in assets under management as of December 31, 2013 and 15 investment strategies, Matthews employs a bottom-up, fundamental investment philosophy, with a focus on long-term investment performance. For more information please visit us.matthewsasia.com
Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country and sector strategies may be subject to a higher degree of market risk than diversified strategies because of concentration in a specific industry, sector or geographic location.