China’s growth story is still alive despite patchy reforms, a disappointing Shanghai free-trade zone and an immature currency, according to a panel of investment experts on Wednesday.
Their message was that the Chinese government should be trusted to lead the world’s second-biggest economy through a difficult transformation and that China remains crucial on the global stage.
“If you’re not bullish on China, you’d better be bullish on the US because Europe won’t lead us to the promised land,” said Peter Perkins, global strategist & partner at the Macro Research Board (pictured far right).
Asia’s Independent Research Summit (AIRS) was held at the Ritz-Carlton hotel in Kowloon, organised by Asia IRP, an industry body, in partnership with AsianInvestor and attended by the great and the good of independent research.
The panel discussion – The Chinese dream: Can the transition work? – centred on whether the country's shift to a more consumer-based economy would be successful and whether the government could handle the challenges.
Tim Summers, principal at XTE China (third from left), said China had lots of entrepreneurial drive and was “transforming events on a global scale,” with far-reaching consequences for the global economy.
“The nature of innovation will change,” Summers said. “Globalisation will not be US or Europe-led in future.”
Touching upon this, the previous panel spoke about the emergence of technology titans such as Alibaba as examples of the new economic model China is attempting to adopt.
Jack Ma’s company raised $25 billion in its September New York IPO – the world’s largest – although the listing was seen as overpriced in some market quarters.
Both panels were bullish on the role of the new economy during China's transition.
“Alibaba is remarkable. The new economy is set to account for a far larger piece of [China’s] GDP than [it is] today,” Velisarios Kattoulas, chief executive of the Poseidon Group, said. In 2013, China's services sector accounted for 46% of GDP, eclipsing industries for the first time.
Another example cited by the panel to illustrate this shift into technology was the encouragement of foreign investment in the game console industry in Shanghai’s Free Trade Zone.
The open-door policy should be seen as a soft opening by the Chinese government, said Benjamin Schmittzehe, chief executive of Schmittzehe & Partners (second from left).
“This could be a petri dish for a broader opening. It is how China’s government operates; by introducing things on a limited scope to let entrepreneurs interpret the situation and implications first,” Schmittzehe said.
However, that was where the positives stopped for the FTZ, which was launched to much – kneejerk – fanfare in September last year. At the time there was some confusion as to what it actually meant and the panel suggested the idea was good but that the timing was off.
“Everyone is disappointed by the FTZ,” Bill Stacey, chief economist at Vanda Securities (fourth from left), said. “Shanghai is richer now than at any other point in time when the FTZ would have been [more] effective.”
Summers echoed the point, suggesting that the FTZ model was subject to the law of diminishing returns and would have been much more effective in the 1980s.
Renminbi unready
The question of timing was also cited when discussion turned to the renminbi, with all accepting that full convertibility was a long-term process.
Stacey said the Chinese currency was still at the very early stages of being used globally, while Perkins said the world was not yet ready for a fully convertible Chinese currency.
Neither was China, he added. “If China is really ready to have a global reserve currency it will be very profound. They need to be a lender and consumer of last resort and the country is not ready yet,” Perkins said.
None of the panellists appeared concerned with China's burgeoning shadow banking industry nor the potential for bad debts to spiral out of control, which has worried investors in recent years.
The China panellists said it was a case of when – not if – China experienced a financial crisis but that the government’s ability to control its markets and institutions set it apart.
“The country is on the right track. The government is aware of problems and has the intellectual firepower to do something about them,” Kattoulas said.
Not everyone at the conference was so optimistic though, not least on a previous panel where China's vulnerability to a global downturn as geopolitical worries intensified was laid bare.
Gillem Tulloch, founder of GMT Research, said he would not buy into the Shanghai stock exchange. “Corporate China is on peak earnings and the economy has been swamped by cheap debt. It is due for a comedown,” he said.
