Moving target - There is no 'minimum' percentage below which Chinese growth cannot fall


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

China’s recently-announced and much-anticipated second-quarter GDP numbers have apparently dismayed some commentators because that now makes it five quarters in a row the world’s second largest economy has expanded by less than 8%. Here on The Value Perspective, however, we are less troubled by the actual growth figure of 7.5% than this apparent expectation it should be higher.

Of course, 8% is not the first minimum threshold, as it were, for market expectations – before that there were other higher percentages, below which people did not expect Chinese economic growth to fall. Gradually, however, the market has grown accustomed to the number trending slightly down, each time consoling itself that, while that was pretty uncomfortable, at least it was not going to get much worse.

For some, it is now inconceivable Chinese growth could ever reach the depths of a rally bad number such as, oh, 6% or 5% when, as we pointed out in China’s steel, a really bad number would actually be one preceded by a minus sign. As we also noted in that piece, the investment mistake being made here is the one behavioural finance experts call ‘anchoring’.

Without realising it, people can often ‘anchor’ their perceptions on the current environment rather than recognising there could be a different environment in the future. This can cloud their judgement when valuing an investment’s prospects so that, for example, they can overlook how very few economies – even rapidly growing ones – have managed over the long term to avoid periods of negative growth.

Perhaps China will buck that trend but the inability of investors to entertain the possibility things could in future be materially different from the way they are now will probably do them a disservice – in this instance, either when it comes to analysing a range of different scenarios involving China and all the other markets that depend on China or simply in managing their expectations in a realistic way.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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