By Geoff Raby
If 2016 continues as it has begun, we could expect a year of unpleasant surprises and shocks. The risks come not from the fundamentals of China but from confidence. The first week of the new year's trading on China's exchanges showed this, and we're seeing it again, with world headlines screaming that in 2015 China recorded its lowest annual growth rate in 25 years! While true, it is meaningless.
When trading resumed in China in the first week of January and stock prices fell sharply, it triggered a global sell-off. Yet there was little reason for this panic. First, anyone keeping half an eye on China's securities markets would have been aware that the ban on institutions selling stocks introduced at the time of the turmoil last June would be lifted on January 4. Without an extension of the restriction, it was inevitable that those holding stocks unwillingly would seek to offload them as soon as they could.
Second, China's markets are largely irrelevant for China's real economy and for the global economy beyond, other than through the nebulous and tenuous linkage of confidence. Retail investors, accounting for about 80 per cent of stocks, dominate China's markets. Accordingly, China's sharemarket matters little to capital formation within China. The wealth effect of a general fall in prices was also minor.
However, as in June last year and early this month, the government's misguided attempt to manage market instability was again distinguished by ineptitude. This is worrying. China's Security Regulatory Commission (CSRC) introduced an automatic halt to trading mechanism if stocks fell more than 7 per cent in a session.
With the fear of a halt to trading, this only encouraged more selling, so trading was suspended over three days. A joke circulated that traders' wives were unhappy that their husbands were returning home mid-morning, so they were watching CNBC coverage of the opening session of trade in Shanghai and Shenzhen to know when to leave home before their return.
Embarrassingly, CSRC chairman Xiao Gang was forced to scrap the circuit breaker in its first week. Markets settled somewhat and have been trading higher since. Late last week it was reported that Xiao had been sacked, followed by a Reuters report that he had tendered his resignation. CSRC demanded that Reuters retract the story – which they have refused to do – and were then punished by having their Wechat social media account deleted. Whatever the truth is in all of this, it is far from the calm, steady management and prudential oversight investors expect of the chief securities regulatory body.
All this is occurring against the background of the ongoing investigation into the brokerage industry that has been under way since the market turmoil of last year. Interestingly, the Public Security Ministry, not the Party's Central Commission for Discipline Inspection, is leading it. It is understood this is because a principle target of the investigations is the privileged and protected giant CITIC Securities with whom chief anti-corruption czar, Wang Qishan, is closely aligned. Already, several senior brokers have been placed under investigation and its Chairman, Wang Dongming, was acrimoniously forced into early retirement. None of this, of course, is good for confidence in China's markets.
This week's release of key macroeconomic data was well received by the local markets but has only added to global negative sentiment about China. For those who doubt China's numbers, the 2015 annual growth rate of 6.9 per cent was just too close to the government's target to be credible. Some are arguing actual growth is well below this and China is already experiencing a hard landing. But there is no reason to believe the numbers on this occasion are any better or worse than previously. Over the years, the official numbers tend to be a fair guide and tend to conform to anecdotal observations. The latest numbers do just that.
They show an economy still growing strongly by international standards. For an economy of China's absolute size, a growth rate above 6 per cent per annum is high. Real incomes are continuing to increase by over 7 per cent per annum, which if sustained imply a doubling of per-capita income in just over a decade.
Consistent with sustained rapid growth in incomes has been shift to a more consumption-led, services-based economy. In 2015, final consumption expenditure accounted for 66.4 per cent of GDP, compared with just 51.4 per cent of GDP in 2014. It should not be a surprise then that the services sector – for the first time ever in China's history – accounted for more that half of GDP (50.5 per cent). So the "workshop of the world" is now becoming the world's services sector. As a final piece of consistent data, China's urbanisation rate reached 55 per cent in 2015, surpassing the government's targets.
Certainly China still has significant headwinds, if not storms to navigate, including the well-known triumvirate: property overhang, domestic debt, and inefficient state-owned enterprises. But even in the property sector, the recent numbers show recovery in prices in the major cities.
So if not supported by the numbers, why is there the pervasive international pessimism? The botched events surrounding the government's attempt to manage the stock market in June last year and then, incredibly, to repeat the mistake again this month, and last August's amateurish efforts to reset the yuan exchange rate, have harmed confidence in the leadership's ability to manage the economy.
Under President Xi Jinping, China's economic management has changed from technocratic to autocratic. Politics and positioning within the centre of power are likely to prevail over sound policy, which at this time would involve less rather than more direct intervention in markets. Autocratic management could surprise the world in 2016, but not in ways it would welcome.
Geoff Raby is Chairman and CEO of Geoff Raby & Associates and a former Australian Ambassador to China.
This article first appeared in the Australian Financial Review: