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Morgan Stanley Sees China Stealth Spending: Cutting Research

China’s transition toward consumer- led growth and away from exports may be occurring faster than the government realizes.

Official data may have understated household consumption and incomes by $1.6 trillion last year, according to estimates by Morgan Stanley.

The reason: China’s statisticians haven’t kept pace with structural changes in household spending such as on housing and health care, which have grown rapidly, Hong Kong-based strategists Jonathan Garner and Helen Qiao wrote in a Feb. 28 report.

The finding suggests that such spending amounts to about 46 percent of GDP, higher than the 35 percent generally estimated and well below that of other large economies during periods of rapid growth, the report said.

That means the shift to consumption-driven growth and away from exports has been under way for some time, Garner and Qiao said. And it implies that household spending as a share of GDP has risen 2.4 percentage points since 2008, while the official data suggests a 0.5 percentage point decline.

The estimates suggest “China has not been such an outlier versus other countries in its investment trajectory,” they said in their report.

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The global financial crisis may have upended the conventional wisdom that no strong link exists between economic growth and equity returns, says Schroders Plc. (SDR)

In a Feb. 22 report, economist Keith Wade and analyst Anja May reviewed the post-crisis relevance of a 2005 academic study of 53 nations that had found no clear relationship between shifts in stocks and in gross domestic product.

While the U.K’s recession and an eight percent gain in the FTSE 100 Index (UKX) over the last year backs that view, the London- based Schroders team found a “stable and significant” correlation between the performance of an economy and equities. Economic growth and inflation appeared to have an equal effect on equities in the decade before the financial crisis. Then, after 2007, equities performed positively when GDP was growing and negatively when it was falling, regardless of inflation.

That may be because monetary policy has widened its focus, said Wade and May. The health of the economy rather than the rate of price increases now tends to drive monetary policy and markets are more attuned to the actions of central banks.

The Schroders team found over the past six decades that there has often been a link between the economy and equities during the recovery, expansion and slowdown phases, only for it to break down in recession.

Greater correlation between economic growth and equities may not necessarily be bad for investors in the current low expansion environment, as proved by the U.K., said Wade and May. Markets may reflect anticipated rather than current growth.

“If expectations are key, a poor economic outlook will already be priced in and investors’ returns will depend instead upon whether market expectations are overly optimistic or pessimistic with regards to future GDP growth,” they said.

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The shakeup in leadership at the Bank of Japan will leave it with the third-oldest executive among Group of Seven central banks.

The nominations of Haruhiko Kuroda as Governor and Kikuo Iwata and Hiroshi Nakaso as his deputies would boost the average age of the Bank of Japan’s top officials to 65.7 from 61, according to Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

He focused on the ages of each central bank’s chief and his immediate deputies. The European Central Bank’s leadership has the oldest top tier at 67, while the Bundesbank’s average age of 46 is the youngest. The Federal Reserve Board’s average age is 62.5 for executives, and the Bank of England’s main officials average 59 in age.

“Is it right to favor the knowledge and experience that comes with age or to trust in the fresh ideas and energy of a younger generation,” Ueno asked in the Feb. 27 report.

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Latin American economies need to look at themselves rather than at richer nations when trying to explain economic imbalances.

A study by Capital Economics Ltd. economist Neil Shearing based on the 1950s work of Australian academic Trevor Swan suggests that excess domestic demand may have been the principal cause of inflationary pressures and potential asset bubbles in Brazil and its neighbors, rather than strong currencies brought about by stimulus in the U.S.

By contrast, eastern European nations do require lower exchange rates even though the countries have been quieter in criticizing industrial economies for pursuing stimulus.

Shearing used a “Swan Diagram,” which shows economies in balance have low inflation and high employment alongside a current account in equilibrium. There are various combinations of real exchange rates and domestic demand at which this success can be achieved.

Shearing finds Egypt and South Africa are among those needing their currencies to decline while China, Russia and South Korea require theirs to rise. Brazil and Peru would benefit from weaker domestic demand, yet Hungary and Slovakia need it to strengthen. Mexico and Thailand are closest to balance and thus set for strong economic performance, he said.

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Worldwide economic growth has been “neither strong nor balanced” in the past five years, despite a vow by Group of 20 nations to make it so.

That’s the conclusion of a report released last week by Bank of Canada economists Robert Lavigne and Subrata Sarker. It suggested any decline in global current account imbalances has been the result of cyclical forces rather than from permanent shifts in how economies work.

While they have shown signs of achieving fiscal consolidation goals, G-20 members, whose leaders began meeting in 2008, have had only limited success in their pursuit of more flexible exchange rates, the economists said in the study. China is among members that manage their currencies.

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Money isn’t what it used to be in the U.K.

Its value has fallen 67 percent over the past three decades, a study by Lloyds TSB Private Banking found. That means someone today would have to spend 299 pounds ($454) to have the equivalent purchasing power of 100 pounds in 1982.

Inflation has eroded the purchasing power of cash at an average rate of 3.7 percent over the past three decades. The price of bread, for example, has jumped from 37 pence to 1.24 pounds. In the future, if retail prices rose 2.8 percent annually the value of money would fall another 56 percent over the next 30 years.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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