At the risk of sounding like Neville Chamberlain, how bizarre that we should be panic-selling our stock-market investments in reaction to the news of a slight economic slowdown in a faraway country to which we export little and whose direct investments in our own economy created fewer than 5,000 new jobs last year.
Throughout the mini-crash of 2016, it has become received wisdom that a Chinese slowdown is threatening the global economy, spreading contagion to every corner of the globe. The fear manifested itself in a 3.5 per cent drop in the FTSE 100 on Wednesday 20 January, a day when a flurry of good-news stories about the British economy, with rising car production and falling unemployment, was overlooked by investors, who instead fretted about the news that the Chinese economy had slowed slightly, from 7.3 per cent growth in 2014 to 6.9 per cent last year.
According to the pessimistic narrative, China is the engine of global growth. If it falters, the rest of the world economy falls. And if the slowdown doesn’t look too bad on paper, empty shopping centres, closed factories and unsold flats tell a different story. China has failed to make the transition from an export-led economy to a consumer-led economy. Without making that transition, the Chinese economy is doomed. And thanks to globalisation, that means we are all doomed.
This narrative is hard to square with the facts. To deal with them in reverse order, the assertion that the health of the UK economy is somehow inextricably linked with the wellbeing of China’s is bunk. China has been a fast-growing market for UK exports, yet in November it still accounted for only £1.5 billion of the £25.3 billion of goods and services exported by UK firms. Moreover, our exports to China are still growing, in spite of the slowdown there: they grew by 0.6 per cent in November compared with October.
What about Chinese investment in the UK? From the way George Osborne goes about begging China to finance his pet infrastructure projects, it would be easy to gain the impression that our economy has become pathetically reliant on Chinese businessmen and their wallets.
Yet Chinese investment, though very welcome, isn’t especially important to the economy as a whole. In the last financial year, 500,000 new private-sector jobs were created in the UK economy. Of these, 84,000 were the result of direct investment by overseas businesses — but only 4,700 by Chinese firms.
Overall, Chinese investment in the UK is highly concentrated in two sectors: finance and property. Chinese developers have recently pulled out of three large commercial schemes in London, but they have only ever been minor players. Most property investment by the Chinese involves small investors buying up flats. If any industry has reason to worry about a Chinese slowdown, it is London property developers — yet perversely their shares have boomed over the past year while the rest of the market has been spooked by the prospect of a Chinese slowdown.
As for the exposure of UK banks to Chinese debts, there are £145 billion of outstanding loans, according to the consultancy Fathom. Much of that, however, is concentrated in two banks, HSBC and Standard Chartered, the first of which keeps threatening to leave the country anyway. Many might say good bloody riddance: move to Hong Kong and let the Chinese government bail you out if it all goes wrong.
But that assumes things are going to go hugely wrong in China. There is scant evidence that they are. Some choose not to believe official Chinese statistics that the economy grew by 6.9 per cent last year, preferring to pick out data showing falls in electricity generation and petrol consumption. But as is now well established in western markets, such is the focus on energy efficiency that energy consumption is no longer a good proxy for economic growth. If you were using fuel consumption as a proxy for the state of the UK economy, you would come to the conclusion that we have been in a perma-recession since the end of the last century.
What the official Chinese statistics seem to show is that the country is engaged in a strong transition from an economy led by manufacturing and construction to a consumer-led economy. Cement production was down 10 per cent in the year to December, but retail sales were up 11 per cent. As for the property market, so often the source of bad debts, the risks seem to have been alleviated a lot since last April, when the price of new homes was falling 6.1 per cent year on year. They are now showing an annual rise of 1.6 per cent as the shake-out from the mad property boom of the late 2000s stabilises.
For all I know, these statistics could all be made up by a team of patriotic toilers in orange jumpsuits at the Ministry of Truth in Beijing, but few western commentators seemed to question them when they were showing double-digit annual growth in GDP. The figures were consistent with what you could see on the ground: rapidly changing skylines, increasing traffic and obvious signs of wealth. So why are they suddenly seen as so suspect now?
As for the crash in the Chinese stock market, it has little to do with the economy and there is no reason why it should be replicated in Europe or North America. Chinese stocks have crashed because they boomed by 150 per cent between mid-2014 and the middle of last year, leaving them absurdly over-valued. We didn’t have the boom, so there is no reason why we should have the bust — which means that current low share prices are a buying opportunity.
The idea of a failing Chinese economy taking down the rest of the world plays into a more general pessimistic narrative which has afflicted stock markets ever since the 2008 crash. We have had repeated panics centred on the idea of a Greek exit from the euro bringing down European economies by means of an unexplained mechanism called ‘contagion’. Aside from banks taking a haircut on their loans, it was never quite clear how an economy accounting for 1.3 per cent of the GDP of the EU was supposed to bring the rest of the world to its knees.
China, of course, makes a much juicier subject for stock-market bears. But I struggle to see how a slightly slowing China is going to stop Britons going to shops, especially when real incomes are rising strongly. One doesn’t want to be seen as a Little Englander, but it really is possible to exaggerate the menace of a slowing Chinese economy.