“Over the last few weeks we have seen a number of consumer products multi-nationals announcing very poor sales in China driven by weaker than expected sales and destocking in the supply chain. With a falling property market in the background, are we being too optimistic about the Chinese economy as the authorities try to rebalance? The growth figures put out by the Chinese government have often been treated with some caution: I have read some comments recently that GDP growth may have fallen as low as 3%, against the Government's figures of 7% or more. Any thoughts?”

David Fuller's view

Thanks for an interesting and very important question, which I have also been pondering.  In addition to being in transition, China is now a hugely important economy in terms of global GDP growth.  As a very large and also controlled economy, China is much more of an enigma than other influential countries.  Additionally, our perspective is not helped by often widely divergent views on China’s economic prospects.

The deterioration in sales within China by multinational firms, which you mention, is certainly a concern for those companies and anyone who has invested in them.  Softer property prices, sought by the government, are likely to be a medium-term negative influence on Chinese consumer demand.  However, the much more important factor, I believe, is China’s willingness to allow these companies in, so that they can monitor their products and methodologies on a firsthand basis. 

Empowered with this information, China can then clone both the firms and products which have become popular in their markets.  At this point, foreign multinational companies find their marketing efforts frustrated by bureaucratic and often convoluted regulations which affect profitability.  In contrast, local firms in which influential Chinese officials have invested operate on a playing field which has been decidedly tilted in their favour.  Alibaba is the classic example, combining aspects of EBay, Amazon and Google.  China was never going to be just a milch cow for foreign companies, and we are beginning to see what a formidable competitor it can be.  

Of course when a controlled economy stumbles, the economic consequences can be considerable.  China is no exception.  I do not know what China’s actual GDP growth rate is, and the most informed Chinese economists would only be able to make an approximate guess.  However, I assume it is somewhere between the Chinese Government’s figure of 7% plus and the Western sceptics’ warning of 3%. 

While the difference is disconcerting for those of us who have invested in China, the more relevant statistic is likely to be monetary policy.  If China is now reflating, and I believe it is, then the Shanghai A-Share Index (weekly & daily) may be our best guide.  I was pleased to see today’s upward dynamic, reaffirming recent support near the September low.

If I am missing or underestimating the critical points regarding China, John Ficenec, Questor Editor for The Telegraph has the answers in the next article below.  I will give him the benefit of the doubt if the recovering charts immediately above deteriorate. 

Lastly, on a personal note, I look forward to seeing the author of the email above at our next Markets Now seminar on 10^th November.  A number of other subscribers will also be attending.