China at crucial inflection point, says Mordy

China at crucial inflection point, says Mordy

China at crucial inflection point, says Mordy

We are all guilty of pre-conceptions based on media reports or lazy national stereotypes. For instance, all Brits live like characters in Downton Abbey (sadly not), Americans gorge on fast food (have you seen Love Island?) and Canadians wear nothing but plaid and huge beards (just the hipsters).

On a more serious note, the view of China cultivated by the western media can be similarly misleading. It is often presented as an oppressive communist country where “freedom” is tightly controlled and the State rules with an iron fist. Some stand by that view but it’s a cliché no doubt reinforced by the current trade war between US and China, which is often styled in the media as extension of the Cold War.

The reality is more nuanced. Few dispute the top-down policy control of President Xi Jinping, which has arguably increased. However, the country is undergoing a seismic economic shift from industry to consumer-led.

Tyler Mordy, president and CIO of Forstrong Global is a long-term China bull, who believes the macro story of the rise of the Chinese and wider Asian middle class will continue for some time yet. His firm has done an enormous amount of research on the country but nothing, of course, beats having boots on the ground to get a taste and feel of what is really going on from an economic and investment perspective.

Mordy recently returned from China where he and his team met dozens of policy-makers, economists, government officials, leading companies and institutional investors.

The story in the western world is that China’s growth is slowing dramatically after hitting 6% in the third quarter. The reality, said Mordy, who flew into Beijing before ending up in Shanghai, is a little different.

“It is evident that investors are imposing the current cyclical weakness onto a more powerful long-term economic story."

Doom and gloom statistical growth stories also belie the energy of “technicolour” Shanghai, a behemoth city of about 25 million. While Mordy is cautious of leaning too heavily on anecdotal evidence to steer investment views or decisions, the story of one of their local guides during the trip struck a chord. A finance professional in his late 20s now working in NYC said that his parents have seen a quantum leap in standard of living in China. He also plans to move back to Beijing because of better wages and more opportunity.

Mordy said: “Many of us feel stuck investing in the Western world, which is plagued by aging demographics, low interest rates and big debt. But then you spend some time in a country like this, which has some of those elements, but also has a new world feeling of ‘there's a lot to be accomplished’. There's a widespread feeling of ‘let’s hustle and get stuff done’. The investment opportunities are enormous."

And what about the trade war? Were the Chinese quaking in their boots? Not exactly, said Mordy, who told WP that one economist they spoke to called it the most over-studied macro issue today. It’s a view Forstrong agrees with. On the subject of US president Donald Trump, Mordy detected a shifting view that did not chime with everything the West is telling us.

He said “There's a perception in the West, or at least in the United States, that China doesn't want Trump to be re-elected. But China views Trump as a more transactional president. Wins can be bought versus some other candidates who may be more ideologically driven.

“It wasn't featured prominently during the trip. We’re talking about 1.4 billion people – trade wars really aren’t going to move the long-term orientation but I think they do want to bag a political win and move on, much like Trump does.”

China's capital markets plans

First-hand experience of China’s situation provided fresh insight and filled in some blanks for the macro investor. One aspect that hit home was how Mordy recognized the risks around its audacious ambitions to transition the economy from exports to a consumer-led program and its huge initiatives to cultivate indigenous innovation. "It is a daunting task for any country. The pressure is on Beijing to make it happen."

Another takeaway for Mordy was that, for much of the country’s capital markets plans, it’s earlier days than most people think and there is much work to do to present a predictable operating environment for foreign investors. Mordy and his team met with the management team at the Shanghai Stock Exchange: "What is striking is the wide-ranging nature of their proposed reforms. No one is in denial that serious change is needed. They spent 90 minutes detailing a series of concrete measures to deepen capital markets and boost confidence in their domestic financial institutions."

Signs are evident, though, that policy reflation, put into effect because of China’s concern over cyclical risks and the uncertainty over trade wars, is bearing fruit. Moves to lower interest rates, ease credit conditions and cut personal taxes have been happening for 18 months.

Mordy explained: “That is now showing up firmly in the data. If you look at higher frequency macro data, which we've been monitoring pretty closely, it's stabilizing for sure.

“All summer it was ‘what are you doing to prepare for the global recession; China is going to crash and pull the global economy down with it'. And here we are, the economy is stabilizing. We forecast that, by early 2020, growth will be not only more stable, but will actually pick up materially.

"Of course, growth is not going back to ultra robust levels. But even some stabilization will bring risk appetite back into financial markets. This is now the third soft patch since 2008 that the consensus has misdiagnosed as impending recession. This time, however, growth in China and the wider emerging markets will be leading the world out of weakness."

You can read more about Forstrong’s trip to China on the company’s site by going to its Global Think Blog section.