
Independent Thinking®
Investing in Interesting Times: Evercore ISI’s Donald Straszheim on China
October 27, 2015
Editor’s note: Evercore ISI is a leading provider of sell-side research in the United States and one of the providers of research to Evercore Wealth Management. Here is an extract of a recent conference hosted by Donald Straszheim, Head of China Research at Evercore ISI, for the firm’s clients.
On Economic Growth
The Chinese government’s 2015 growth target is 7%. Official third-quarter growth was reported at 6.9%, and first- and second-quarter growth were both at 7.0%. We don’t believe these values are plausible; the real rate is probably between 3% and 5%.
Many investors are worried about how this slowdown will play out, but we are not as concerned as some. There are green shoots in China that don’t get much press. Passenger and commercial vehicle sales are up, as are a number of other important data, including housing, lending and electricity – so, it’s not all bad. Moving forward, we expect China’s macro indicators to be generally better over the coming months.
The country faces some of its toughest policy choices since 1978, maybe even since 1949. The government now seems to be putting reform on the back burner, as it refocuses on growth. Interest rates have already been cut six times and the currency has been devalued. The current policy clearly is to lift growth, and lift it fast.
On The Chinese Currency
On August 10, 2015, China abandoned 10 years of currency policy to devalue the yuan 3% over three days. That was a big deal. China’s Forex reserves are still enormous: $3.5 trillion down from $4 trillion a year ago, but still up from $1.5 trillion in 2007. We see this issue as manageable. We believe that the Chinese government will now manage the yuan against a basket of currencies, rather than just against the U.S. dollar.
On Chinese Equities
Investors should stay away from Chinese A-shares. There is no obvious end game here, now that the assets of most insiders are frozen, and it is not clear to us that the government feels like there even needs to be an end game. The prospect of equity financing in China has been massively damaged, and small, innovative companies have been badly hurt.
As long as the equity market is a government operation, instead of a real market, we are not interested.
On The Long-Term Outlook
The markets have overreacted to the slowdown in China. While there are serious problems in the country, the end is not nigh. Yes, economic growth has been slowing since 2010, but that’s to be expected, given how large the economy has become. While the era of 10% plus growth is over, China’s economic rise will continue.