In short, credit risks in China are rising. So will China crash? Unlikely. Households have healthy balance sheets (bank deposits are 50 percent of household assets, according to DSG Asia), and China still has the world’s largest stash of foreign exchange reserves, according to data accessible via Bloomberg. To be sure, China’s currency reserves have shrunk by $400 billion over the past year, official data show. Yet talk of panic capital flight from China is a red herring, in my view. The decreasing reserves mostly reflect the rising U.S. dollar (which shrinks the value of non-dollar reserves) and a switch by some onshore Chinese corporates to yuan financing rather than U.S. dollar financing (a welcome trend).
Market Realist – Despite the recent economic sluggishness, there are some signs of strength in the Chinese economy (FXI). First of all, despite a slowdown, China continues to register a growth rate of ~7%, which is more than double that of developed economies. Economic growth may be slowing, but it is still faster than most of the global markets (ACWI).
Households continue to store most of their wealth in cash and deposits as the previous graph shows. The effect of stock market volatility and ballooning debt levels on households is likely to remain limited. This is good for the Chinese consumer (CHIQ).
The strength of the Chinese economy (YINN) can be seen in the strength of its consumer. The recent earnings reports from Apple and Alibaba show that Chinese investors may have reason to cheer.
Apple (AAPL) reported a humongous 99% year-over-year growth in revenues to $12.5 billion in China for the fourth quarter. Apple reported a record quarter in terms of absolute revenue growth. Greater China accounts for ~25% of Apple’s total revenues. Apple CEO Tim Cook said, “The economic question, which I know there’s been a lot of attention on, frankly if I were to shut off my web and shut off the TV and just look at how many customers are coming into our stores regardless of whether they’re buying, how many people are coming online, and in addition looking at our sales trends, I wouldn’t know that there was any economic issue at all in China.”
Apple continues to stay bullish on China. Cook stated that the company would continue “investing for the decades ahead” in China.
Alibaba Group (BABA) also reported a stellar quarter for earnings recently. The company used its smartphone strategy to acquire 346 million monthly average users on mobile devices in its latest quarter, a 59% increase from the previous year. Alibaba revenues surged by 32% to 22.2 billion yuan (or ~$3.5 billion) in the quarter ended September 30, 2015.
The Chinese consumer and retail sectors continue to be sources of strength for the economy.