News & Insights David Murphy: The impact of the US-China trade discussions at the grassroots level is real

David Murphy: The impact of the US-China trade discussions at the grassroots level is real
David Murphy, Head of China Quantitative Insight (CQi), Credit Suisse, tells us where the opportunities for investors lie in China’s consumption-driven economy, and the most important data points investors should track.

The theme for this year’s Credit Suisse China Investment Conference is “Great Expectations.” What are your great expectations for China’s real economy over the next 12 months? 

DM: While China’s economy is expected to remain under pressure from the external environment and an ongoing relatively prudent central government approach to debt, we see consumption as continuing to be the principal driver of the economy. The opportunities for investors in areas of human well-being – health, exercise, foodstuffs, environmental improvement, leisure and entertainment – will continue to grow. Another driver of growth will derive from China’s at least partial decoupling from the US tech sector and the knowledge economy, and its related domestic efforts to ramp up replacement technologies. 

"The impact is real. Among private manufacturers we speak to who export to the US, the share of the US among their exports has fallen from 30% to 20% on average." David Murphy, Head of China Quantitative Insight (CQi), Credit Suisse

How much impact are the US-China trade discussions having at a grassroots level? What is the grassroots data telling us about China’s economy? 

DM: The impact is real. Among private manufacturers we speak to who export to the US, the share of the US among their exports has fallen from 30% to 20% on average. Also, 63% of those manufacturers who export to the US have had tariffs imposed on their products. The primary response of those firms affected is to seek out other markets. But very few are looking to leave China; the local market is big enough for them. 

Impact of US-China trade discussions on Chinese manufacturers exporting to the US 
Source: Credit Suisse, based on CQi survey of 400 Chinese private small-and-media enterprises (SMEs) – including 200 manufacturers and 200 service firms – from 92 cities in 23 provinces across China.

What are the most important China data points investors should track and why?

DM: We view the following four data points as important for investors to track:

  1. Property sales growth – this is a leading indicator of new inventory and land sales, and is particularly important because real estate and related industries account for 40% of China’s total GDP.
  2. Industrial fixed-asset investment (FAI) growth – while all eyes are on infrastructure as evidence of government stimulus, industrial FAI is also worth watching. A meaningful easing in US-China trade tensions could significantly boost industrial FAI, which has otherwise been lagging despite high utilization rates and pent-up automation demand.
  3. Family income growth – it is the ultimate driver of consumption growth.
  4. Unemployment trends – this is most important data point in the eyes of policy makers. As long as unemployment remains under control, Beijing is unlikely to sharply ramp up massive stimulus. Conversely, any spike in job losses will almost guarantee a big spending response.