With the Shanghai index down nearly 20 percent from vertiginous heights reached in mid-May, a lot of people are wondering what next – and not a few are suggesting the Chinese economy is headed off a cliff. Pat Choate begs to differ. “The connection between Chinese stocks and the real economy is zero,” he pronounces. “Chinese corporations do not need high stock prices to keep expanding. They are government-owned entities financed by a government-owned banking sector.”
An institutional economist who was Ross Perot’s running mate in the 1996 presidential election, he ranks among America’s most experienced China watchers. As such, he has never fallen for the story that the Chinese economy has been teetering on the brink of disaster (a story that has been a hardy perennial at least as far back as 2001 when Gordon Chang published The Coming Collapse of China).
He estimates that China’s GDP growth over the next five years is likely to average between 5 and 6 percent. That is lower than the 7.4 percent achieved in 2014 but, as he points out, it is far faster than any other major economy is likely to achieve. It is moreover to be expected that as China’s share of total global economic output increases, its GDP growth will inevitably begin to tail off. That said, Choate believes China still has major opportunities ahead in, for instance, building fast train networks and otherwise improving its infrastructure. Meanwhile it is likely to acquire ever more of the West’s most valuable production technologies, enabling it therefore powerfully to leverage its worker productivity.
An ironic factor in all this is that many Chinese blue chips do not seem particularly expensive. Although price-earnings ratios of 80 and more have been widely publicized, the companies involved tend to be of secondary importance. By contrast, Petrochina, recently China’s big
gest corporation by market capitalization, was on a trailing PE of 16.7 — not remarkably higher than Exxon Mobil’s 12.6. The small premium indeed would seem justified given China’s greater economic growth prospects. Similarly China Mobile is on a PE of 15.0, versus 20.0 for Verizo. (Full disclosure: Verizon’s latest year’s earnings were depressed by special items and the company is on a prospective PE of 12.0.)