China's Economic Slowdown, Perceptions and Reality: Guest Article

China's Economic Slowdown, Perceptions and Reality: Guest Article

Chinese Banks Remain Strong Despite Economic Headwinds

By Stephen Timewell*

Perceptions and reality can be two very different things.

A clear understanding of current economic problems in China depends on what data is being assessed and who is making the assessment. The rate of growth in the world’s second largest economy has been slowing for a number of years, but the rate of growth and its importance, both for China and the global economy, is argued about incessantly and worries can be seen by some as exaggerated.

In March, Moody’s, the US rating agency, revised its outlook for China from stable to negative based on rising debt, dwindling foreign exchange reserves and uncertainty over the capacity to implement reforms.

China’s GDP is expected to be $12.3 trillion in 2016, but what are the key fundamentals, what matters, and what will be the impact on China and elsewhere in the future?

In recent months there has been considerable focus on China’s slowdown, its volatile markets, its productive overcapacity and its need for structural reform. The economy grew by 6.9% in 2015, its slowest pace since 1990, and is set to grow by around 6.5% in 2016. China’s explicit government debt is estimated at 41% of GDP at the end of 2015, up from 33% in 2012, but still low by international standards. While there is a lot of talk of a dysfunctional fiscal system, indebted state-owned companies, the prospect of mass layoffs and local governments on the brink, how severe are China’s problems?

China’s Central Bank has more than $3 trillion in reserves

Those who are pessimistic about China have some arguments in their favour, but the reality is complex. The People’s Bank of China may be facing difficulties but it still had $3.23 trillion in foreign exchange reserves at the end of January 2016, more than triple the size of any other country, and Beijing has the fiscal capacity to recapitalise the banking system. Sceptics may be dubious about the published level of reserves and some believe that Chinese lenders are hiding the level of defaults as the economy slows, but as the conflict between pessimistic perceptions and reality continues, many positives exist.

A recent report by consultants McKinsey & Company states: “In debates about whether growth is a percentage point up or down, we often lose sight of the absolute scale of China’s economy. No matter what rate the country grows at in 2016, its share of the global economy, and of many specific sectors, will be larger than ever.”

China’s 1.4 billion population and huge market is not disappearing and McKinsey’s latest 2016 China consumer report shows that Chinese people are continuing to spend and are becoming more discerning. “Consumers are becoming more selective about where they spend their money, shifting from products to services and from mass to premium segments. They are seeking a more balanced life where health, family and experiences take priority.”

Reinforcing China’s growth is its strong expansion in banking brands. In The Banker’s 2016 Top 500 Banking Brands listing, China’s brand value grew by 41.4% to $206.9bn, putting it within reach of overtaking the US. China’s branding success is built on the performance of its top banks with three of the top five global brands being Chinese: ICBC (2nd), CCB (3rd) and ABC (4th). Also, eight of the Top 10 climbers by brand value are Chinese banks, two more than in 2015.

The Chinese workplace is changing dramatically with official government figures showing 15 million construction jobs lost last year. Beijing is worried that layoffs could bring social unrest, but the economy is much more than one dimensional. There are many positives as well as negatives.

While there are many concerns over labour and reskilling, China continues to go global and McKinsey believes that outbound investment will accelerate in 2016 with One Belt, One Road- related initiatives driving much of it. And this ‘go global’ policy is exemplified by the multi billion dollar overseas acquisition spree by little-known Chinese insurer, Anbang, over the past 18 months.

In the Middle East there are also huge opportunities for Chinese banks and investors to replace reticent US and European banks and investors. Those in the Gulf need to be brave and patient if they want to be a part of this global Chinese surge: qualities that many have not displayed in the past.

It is easy to follow the negative news on China but there are many positive signals on China’s development that are unwise to ignore.  

Stephen Timewell is Editor Emeritus of The Banker magazine. He has been visiting China and meeting with senior Chinese bankers for more than 20 years. He was Editor of The Banker from 1992 to 2003 and Editor in Chief from 2003 to 2009. He lives in London.