We can live with a slowing Chinese economy, said Frederic Neumann, co-head of Asian economics research at HSBC.
“Don’t always buy the headlines, the headlines are screaming China might be falling off a cliff, but if you look at the economy, it’s not exactly true,” he told CNBC’s “Worldwide Exchange” on Friday. “Home sales [there] are holding up, car sales are picking up, and retail sales are doing better.”
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While growth in the world’s second-largest economy shows signs of slowing, Neumann believes it’s a necessary adjustment.
“We’d be quite worried if the Chinese economy suddenly accelerated sharply on the back of a massive injection of debt,” he continued. “We want to see gradually slower growth … and that’s going to be a two- to three-year story.”
What are U.S. companies supposed to do until growth picks up? “Ignoring China would be probably a strategic mistake, yes in the short run, you might see a bit of pain, but it’s still going to be the biggest game in town,” Neumann said.
If growth continues to stall, the primary impact is going to be psychological, he said. “Remember that China’s economy in terms of size today is roughly the same as Japan was in 1989 in the height of its bubble. When the bubble burst and Japan slowed down, it didn’t bring down the global economy.”
When examining China’s markets, Neumann also believes investors should be wary of what they read. Earlier this week, the Institute of International Finance reported that outflows increased as overseas investors pulled $676 billion dollars out of China.
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Neumann believes that number doesn’t paint the entire picture. “Roughly half of what’s been reported as outflows is really a paying down of external debt, so the Chinese corporations have previously borrowed in U.S. dollars, brought that money onshore and are now paying that money in debt and that is recorded as a capital outflow.”
Currency is another important factor to examine when diagnosing how contagious China’s economic illness is. Neumann sees the idea that another currency crisis is in the making as an “exaggerated view.”
“There’s a lot of misunderstanding we feel in the market about what exactly the Chinese are trying to do. The fear was that China’s going to join the currency wars, they’re going to aggressively depreciate the currency, but they’re really just trying to move away from U.S. dollar to maintain currency stability,” Neumann said.