China economic crisis unlikely to affect the UAE investment deals

(MENAFN- Khaleej Times) China will continue to strengthen its cooperation in the Middle East region to boost its bilateral trade and meet its future energy needs says an expert.

Richard Jerram chief economist at Bank of Singapore said China-Middle East trade increased dramatically in past decade growing by more than six times to $230 billion in 2014 due to growing oil demand of world's second biggest economy.

"In 2015 China became the world's biggest importer of crude oil more than half of which came from the Middle East. Today China is the Middle East's second biggest trading partner trailing only behind the United States" Jerram told Khaleej Times during an interview in his visit to Dubai recently.

Jerram who joined Bank of Singapore in June 2011 is responsible for analysing and forecasting global macro developments. He has been working as an economist for two decades and spent most of his time in Japan and Singapore.

To a question about any impact of recent changes in China economy on recent agreements signed by the UAE for co-investment in industrial and energy joint ventures he said it is unlikely to have any negative effect.

"I doubt there will be much impact. The signing of such agreements is typically done so with a long-term view" he said.

He said China still has a large external surplus to re-cycle which implies continued large investment flows to the rest of the world.

"Energy security will remain an important issue to China so we can expect continued attempts to deepen cooperation with the Middle East region" he said.

"It is not that Chinese demand for energy will stop growing or reverse - it will be just growing at a slower pace. Growth opportunities are likely to be similar areas to the past decade."

Jerra a CFA charter-holder said the heyday of nine to 10 per cent growth that China experienced is over. This was inevitable and should be interpreted in the context of China's rebalancing.

"Structurally China's economic growth has to shift from one that is investment-led to one that is consumer-driven. Historical precedents suggest that such a shift is associated with slower growth. China's rebalancing is necessary but it means that investment trade and manufacturing will be less dynamic. The good news is that China's rebalancing will benefit sectors associated with Chinese consumers" he said.

Industrial production growth - which is probably the most relevant metric for Middle East exporters to China - has already slowed substantially.

"Ahead of the global financial crisis it was running at about 15 per cent and now it has slowed to six per cent. Will it continue to slow? Yes probably but the bulk of the adjustment is behind us.

"In the shorter term he said China's manufacturing PMIs look more stable and the non-manufacturing readings remain above the 50 threshold. Hearteningly most China indicators suggest that growth has stabilised so it looks as if policy stimulus is still effective."

Investment opportunities

Jerram said the transition in the Chinese economy suggests that the most interesting opportunities will arise in the domestic consumer-facing parts of the economy.

"It can be hard to invest directly into these businesses but there are plenty of listed firms that have exposure. Of course the world has woken up to the idea that this adjustment is a policy priority so the related shares are not cheap.

"In general we prefer Chinese equities listed in Hong Kong rather than the Chinese A-share market where the governance can be very poor which is a common hazard for investors in emerging markets.

To a question he said the recent concern over China seems to be a 'policy crisis' as much as it is an 'economic crisis'. The economic problems - growth slowdown and credit bubble - have been evident for several years.

"What changed in 2015 was a loss of confidence in the ability of policy-makers to deal with the problems. There has been an unfortunate view that Chinese policy-makers were somehow all-seeing all-knowing and all-powerful so the chaos around the bursting stock market bubble followed by the clumsy currency depreciation came as a nasty wake-up call. Quite why people ever believed that a corrupt single party system based on state capitalism would be efficient was never clear to me."

About the key challenges facing the Chinese economy in 2016 and beyond he said China has standard problems surrounding the maintenance of a reasonable growth rate as it heads towards the middle-income trap.

"More immediately it has to deal with its credit bubble which continues to expand. And at the same time it needs to ward off the sort of existential threats that put paid to the Soviet Union" Jerram concluded.

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