How turbulence in China stocks masks a bigger story

By Matthew Craft
AP Business Writer

NEW YORK (AP) — Doubts about China have rattled investors’ nerves this summer. A plunge in the country’s high-flying stock market along with sudden drops in its currency have heightened fears about the world’s second-largest economy.

To Jason Pride, director of investment strategy at Glenmede, scary headlines like these conceal otherwise encouraging news. China’s loosened grip on the country’s currency will likely turn out to be a good thing, he says. The pace of China’s rapid growth has slowed, but it’s largely because the government is attempting a massive makeover, an effort that, if successful, will put the economy on more stable footing.

“You look out 10 to 20 years,” Pride says. “It’s possible that their consumer market will be larger than any market we know, just because of the size of the population.”

In a recent interview, Pride laid out his views on changes in China, the appeal of that country’s growing middle class, and the U.S. market’s performance this year.

Q: There has been plenty of news this year — Greece, China, plunging oil prices — but the Standard & Poor’s 500 index is nearly where it started 2015.

A: Yes, there’s a lot going on. Crude oil is down, the Federal Reserve is talking about hiking rates at least once this year, China is letting its currency drift downward, and Greece almost hit the fan. Imagine if somebody had read you those headlines at the start of the year. Would you have expected international markets to be ahead of the U.S. market? Yet here we are.

Q: How do you explain it?

A: Near the end of last year, there was a complete about face in central bank policy. The U.S. Federal Reserve was still buying bonds and not even talking about hiking rates yet. Now they’re not buying more bonds and talking about hiking rates. Europe and Japan are buying bonds in full-force right now. So for the economy and the markets to react this way in the face of oil prices, Greece, China and all that, I think it reflects the power of central banks.

Q: China has garnered a lot of attention recently. Some analysts have warned that its stock-market bubble poses a bigger problem than people realize.

A: There’s a dramatic difference between local Chinese stocks, the A-shares, and Chinese stocks traded on the Hong Kong stock exchange. The dichotomy between the two, you could drive
a truck through it. Local Chinese stocks were trading at 54 times earnings at the end of June. Hong Kong-traded Chinese stocks were trading at 14 times earnings. Big surprise that it’s the local A-shares that have taken it on the chin.

The Chinese investor scene is really unique relative to what we’re used to. About 6 percent of the population actually holds stock — 6 percent. You know what it is in the U.S.? It’s a bit more than 40 percent. So I don’t think the fallout from the falling stock market is as widespread as it would be here in the U.S.

Q: So, worries about China are overblown?

A: There’s a really big story behind this that people don’t talk about. The way many of these emerging-market countries operate has changed dramatically over the past 10 to 15 years. You used to talk about emerging markets in Asia and it was about offshoring low-cost manufacturing. Many of these economies built up their infrastructure to take that manufacturing on. They were building highways, cities, railways, shipping ports and airports. Look at the numbers now in China. The amount of money the government is spending in that direction is coming down dramatically. That’s the primary reason their GDP is dropping. The offset is that the consumer is growing. It’s a real shift.

The consumer is seeing between 8 and 10 percent income growth. They’re still saving a lot, but they’re spending a lot, too. They’re moving up the ladder and changing their spending habits. It’s not just about buying food and the bare necessities. It’s about buying insurance for your family, having a car, going to see movies, buying Starbucks coffee of all things.

Q: People have talked about the rising middle class in Asia for years now. You think the trend hasn’t finished.

A: There’s a reason that every big company out there — Starbucks, Nike, Yum brands — has been looking at that marketplace.

We’re not blind to the idea that stock-market weakness and the slowdown in the economy have an effect on the consumer. But our take is that the consumer growth story is large enough to ride out the bumps.