China Trade Worries More Important Than Slowing Growth

Jeremy Glaser: Stocks were lower again on Tuesday, and one of the worries was about Chinese growth. I'm here with Preston Caldwell. He's an equity analyst with Morningstar, he follows China. We're going to talk a little bit about why these worries have re-emerged.

Preston, thanks for joining me.

Preston Caldwell: Thanks, Jeremy.

Glaser: Let's start by looking at what these headlines are or why all of the sudden are we talking about China again.

Caldwell: There's two basic issues. For one thing, in the third quarter official GDP growth slowed down to 6.5% after a 6.7% in the previous quarter. Likewise the other official figures like retail sales and fixed asset investment have similarly decelerated. The other major category is trade-related worries. That's on everybody's radar. Trade tensions have increased and now we have the looming prospect of a trade war between the U.S. and China.

Glaser: Let's talk about if any of this is really new news or is it just re-emerging here.

Caldwell: It's interesting. I would say the GDP growth slowing from 6.7% to 6.5% is almost a nonissue. China's official GDP figures are notoriously unreliable. In fact we think that a slow down in growth actually already occurred over the 2014 to 2016 period, but it wasn't reflected in the official GDP figures. Instead it was reflected in real activity figures like electricity consumption or cement consumption. Actually if you look in the 2017 to 2018 period we had a slight recovery in official activity that likewise wasn't picked up in official GDP figures. Now it looks like maybe growth is slowing again, but it's nowhere near the magnitude of the 2014 to 2016 downturn. As of now we're not particularly concerned.

Glaser: What's your long-term outlook for China then?

Caldwell: Our view is still very relative. The consensus we think is China's economy re-balances, that growth will slow to a 4% growth rate over the next four years, compared to a consensus of about 6%. In particular we think the economy is going to move heavily toward consumption as opposed to its reliance on investment in the past.

Glaser: If I'm an investor outside of China does this have a big impact on me? Does slowing China mean something for a U.S. based investor, for example?

Caldwell: We would encourage investors not to buy into short-term overreaction. As far as our long-term outlook consumer-exposed names should disproportionally benefit as the Chinese economy re-balances. On the other hand, names that have been exposed to China's investment boom, like certain basic material stocks, will suffer as global basic materials pricing is effected by the slowdown in Chinese investment materials consumption.

Glaser: Preston, thanks for joining me today.

Caldwell: Thanks, Jeremy.

Glaser: From Morningstar, I'm Jeremy Glaser. Thanks for watching.