China - Hard or Soft Landing?

The Chinese economy is critically important to Australia as one of our key trading partners.  It used to be said that if America got the 'sniffles' Australia gets pneumonia, now it can be said if China has a headache, Australia develops a tumour.

So with China making headlines in recent months, we asked Clay Smolinski (Portfolio Manager - Platinum Asset Management) whether he believes the Chinese economy is heading for a Hard or Soft Landing?  (note definition of Hard Landing is "An economic state wherein the economy is slowing down sharply or is tipped into outright recession after a period of rapid growth, due to government attempts to rein in inflation")

The transcript.

 Mark Draper: Here with Clay Smolinski, Portfolio Manager at Platinum Asset Management. Thanks for joining us Clay.

Clay Smolinski: You’re welcome, Mark.

Mark Draper: Let’s talk about China. Hard or soft landing economically?

Clay Smolinski: Certainly. I think when answering the question when looking inside of China, evidence of the hard or soft landing is very much determined on what industry you’re looking at, at the time. So we take the heavy industries. So we’re talking about industries like steel or cement where there’s over-capacity. There is a clear hard landing going on.

So there has been a big fall-off in construction activity. The government is now planning forced closures of capacity in those industries. We’re talking about 1.5 million steel workers being laid off over the next 12 months. Times are very tough there. However, you look at other sectors of the economy and we’re talking about sectors such as air travel, ecommerce, healthcare. There’s no concept of a landing there. These sectors are in take-off mode, growing very strongly, creating a larger amount of new employment and that’s really where we’re focusing our attention and that’s really where our investments are today in China at Platinum. We’re focusing on those consumer and service-focused industries.

Then the question is when we put those two together, what are we seeing on a broad basis? And what we see is – we look at the leading indicators. What we see is that while growth has slowed, the economy certainly isn’t in store mode.

So first, one leading indicator, a good one is wage growth. So two years ago, wage growth across China was growing at 10 percent per annum. Today that number is five percent per annum. A big step down but five percent per annum is still fairly healthy in our book.

Another interesting indicator is housing prices. So you can forget about the stock market. The real investment class of this nation is residential and commercial property and house prices in China have actually been really strong over the last 18 months. We’re seeing very strong in tier one cities like Shanghai and Beijing but it’s also prices are rising in tier two and tier three cities.

Then finally we see the government and the government is increasingly becoming more – really need to take more measures to support growth. We see that through cuts through interest rates. But also there are a number of industries where a lot can still be done.

China is not a developed country yet by any standards. So we think about the investment that can go into things like healthcare, the investment that can go into environmental solutions. They have a large environmental problem. So these are areas where we can see stimulus that – and it will be stimulus that will be productive and good for society.

So when we put all that together, it feels to us that the economy has stabilised and we’re very much in the soft landing camp for now.

Mark Draper: That’s great. Thanks for your update Clay. I appreciate it.

Clay Smolinski: You’re welcome.