Donald Chan/ReutersRailroad viaduct construction last year in Zhengzhou, Henan Province.Beijing continues to resist a new large fiscal stimulus package, despite a report last week that the nation’s manufacturing sector had contracted in July at its fastest pace since last summer. Instead, the government announced a “mini stimulus” that included a tax cut for small companies, a reduction of red tape and costs for exporters, and the opening of investment in railroad construction to private capital.
Strengthening private small and midsize enterprises has been an oft-stated but unachieved goal. Most of those businesses have limited access to bank loans and must instead rely on informal financing channels to get access to capital. In the current downturn, the Economic Observer newspaper recently reported, banks are aggressively calling in loans, leading to even more strains for many small firms.
Perhaps then it is good news that Zhou Xiaochuan, head of the People’s Bank of China, wrote in the People’s Daily newspaper on Friday that the central bank would support small businesses by ensuring easier access to financing. A public message like this from the central banker may be harder for the banks to ignore.
In an obvious sign of deepening concern about local debt problems, Beijing has suddenly announced a new nationwide audit of local debt, the third in two years. The Times reported that the Detroit bankruptcy may have spooked policy makers. Investors likely will not believe whatever new numbers are released publicly, but at least Beijing is not pretending there is no problem.
Bearishness toward China has now gone mainstream, and rare is the day without a report on the economy’s impending crash. Bloomberg News has a report on Monday on what might happen if Chinese growth suddenly drops to 3 percent, as at least one investment bank now says is possible.
Investors should consider the possibility that the pendulum has swung too far too quickly, and that the situation is not quite so dire. The next few months may be difficult, but there is the potential for another shift in sentiment in the period before and just after the Communist Party Central Committee’s third plenum meeting in October. Last week, Xi Jinping conducted an inspection tour of Hubei Province and signaled some of the economic reforms and resolve that is likely to come out of the third plenum.
Even in the midst of the broader realization that China’s economy has significant problems, some investors have been able to make money choosing the right sectors and companies. Over the last three months, for example, the CSI Overseas China Internet index has climbed nearly 40 percent.
Tencent has a market capitalization of $83 billion, about the same as Facebook’s, while Baidu, which reported better-than-expected earnings last week, is worth $44 billion, and Alibaba may be worth $100 billion or more after its stock offering, giving China three of the most valuable Internet companies in the world. China’s Internet market is mostly off-limits to the large foreign Internet firms, and so the easiest way for outsiders to participate is through investing in shares of the overseas-listed firms.
China’s Internet market is huge and continues to grow, and even segments like users over 50 years old, expected to top 200 million this year, are larger than the population of all but a handful of countries.
But the local giants are not satisfied with the domestic market. Tencent has the most expansive international plans, both through investments like the Activision buyout announced last week and by aggressively marketing WeChat, its mobile social networking service that competes with Facebook outside the United States. Tencent has hired the soccer star Lionel Messi, not a household name in the United States but a global superstar, as its spokesman for WeChat.
The Internet is not the only market segment that continues to grow despite China’s slowdown. Nor is it the only one that seems increasingly unfriendly to foreign company participation. GlaxoSmithKline, which has been accused of all sorts of bad behavior in China, looks to be the poster child for Beijing’s campaign to squeeze profits in the health care sector and drive down drug prices. Such moves have hugely positive political and social benefits.
Earlier this summer, regulators opened an antimonopoly investigation of five foreign makers of infant milk formula, accusing them of price fixing. The firms quickly cut prices despite huge demand for foreign infant formula that now affects the global supply.
On Monday, the government, via the official Xinhua news agency, has taken aim at foreign luxury carmakers, writing that China should investigate their pricing because they reap exorbitant profits.
The operating environment for foreign firms, both economically and politically, is getting increasingly difficult, but foreign investors should continue to have plenty of public market opportunities, both in the short term and the long.