Michael Hasenstab: «Why It Is Not the Time to Panic About China»

Michael Hasenstab

Michael Hasenstab, Franklin Templeton

The first few days of 2016 have seen a return to the type of volatility global markets experienced in the third quarter of 2015. Franklin Templeton’s Global Macro CIO Michael Hasenstab believes many of these fears may be overblown.

On the whole, our view remains that underlying conditions in the Chinese economy are fundamentally more stable than markets have recently indicated, writes Michael Hasenstab.

We still believe that China’s policymakers have both the tools and the financial firepower to counter the recent slowdown and keep growth on track at 6% to 7%, which in turn we believe is sufficient to support global growth.

Short History

Over its relatively short history, China’s domestic stock market has been prone to extreme fluctuations, partly because it has been closed to international investors. And although China’s stock market still plays a relatively minor role in its economy, both as a source of capital for companies and as assets for households, its importance on both sides has increased.

While some observers feel the Chinese authorities may seek to engineer a substantial depreciation to boost growth through exports—leading to currency wars that may disrupt global growth and the global financial system—our view is different.

Moderation of Growth

We do not share the markets’ current pessimism over the trajectory of China’s economic growth. We view the recent moderation of growth in China as an inevitable normalization for an economy of its size; its nominal level of gross domestic product (GDP) is now five times the size of what it was 10 years ago. Thus, a lower rate of growth still represents a massive level of global aggregate demand.

In our assessment, the quality of growth in China has improved in recent years. Increasing labor costs and interest rates have put downward pressure on profits; however, higher wages boost consumption, which has increasingly become the anchor of Chinese growth; we estimate that consumption is close to 60% of GDP and rising. Additionally, new interest-rate liberalization policies can redirect capital to the whole economy, particularly the private sector, which we expect to be the future driver of growth.

In A Crucial Stay of Rebalancing

Overall, based on our analysis, we believe China will remain on course, with GDP growth decelerating moderately toward the 6% mark over the next few years while the economy shifts toward consumption, services and higher value-added manufacturing.

In short, China’s economy is in a crucial stage of rebalancing but we believe it is not at risk of collapsing. Some of the traditional engines of growth (manufacturing, real estate and local government spending) have stalled or contracted but new engines of growth (the service sector and a new generation of private sector companies) are taking over.

In Search of New Equilibrium

Although we may continue to experience volatility in the near term, we remain optimistic about China’s outlook as it searches for its new equilibrium.

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