China had declared a target for the for the economy of 5.5% for this calendar year. They're obviously not going to achieve that. Last year we saw 8.1% growth, and so far this year we're seeing only 2.5% growth. So if China manages to grow by five and a half percent in the second half, the average for the year will only be 4% and that's achievable.

I think three and a half, 4% for the year is achievable. One technical foot note I should highlight for the audience, is that the world's convention for reporting GDP, quarterly GDP growth, is sequential. Quarter on quarter. And sometimes they annualize numbers, sometimes they don't. But in China they never report sequential, quarterly numbers. They report year numbers. So 2.5% for the first half of this year, actually means outright contraction on a sequential basis.

There was actually a outright contraction in the first half of this year much smaller than what we saw in early 2020 on the onset of the pandemic.

So are we worried? Or should we be worried?

I would say that there's a spectrum of opinions in the market. Some are very bearish. They're very worried about a collapse in the property sector and with repercussions for the economy, we are on the more optimistic side.

Let me explain why; as opposed to say the challenges faced by the US and Europe, the challenges faced by China are 100% domestic and policy created. It's self-imposed Beijing made an explicit choice to impose a number of different policy restrictions. Many of which were concentrated in housing market and housing is absolutely key because housing dominates GDP, housing also dominates wealth.

You may have heard that housing and related activities account for about 25%, 30% of GDP, but in terms of private wealth housing accounts for 80%. So it's very important. If you have a collapse in the housing sector you need to deal with collapsing consumption and other domestic demand.

So why did Beijing crack down on the housing market? The chart shows something very important for investors to know, to keep in mind, and that is that Beijing has, I think based on my experience, close to 10 years, being very worried about a repeat of what happened in Japan 30 years ago.

And this is a chart that shows GDP growth of Japan. So you can see the shaded area was when the property market collapsed in Japan and this triggered a generation of lost output, basically zero growth for one generation, 30 years. China doesn't want the same thing to happen to them.

So they are preemptively trying to deflate the housing bubble. They believe that the housing cycle has gone too far relative to the demographics, wealth and GDP. Now, this is, this is why China is in a difficult situation. They want the bubble to deflate, but they don't want the bubble to collapse.

And that's why the policy stimulus that we're seeing are very peculiar. They're very different from post 2008, you have very targeted infrastructure spending, not like not very broad based fiscal stimulus, but targeted infrastructure, spending and monetary stimulus has been very modest and hesitant. This is the reason because they don't want to rekindle the property bubble.

They want to remove and reduce the risk of systemic risk in the long run. So what, how do we gauge where the economy will be a year, two years from now? And in the chart we show a dotted line, arrow going up, showing that the economy should converge back to the trend and that's for various reasons.

One is that policy stimulus has already commenced, there's even in addition to fiscal and monetary stimulus, there's regulatory forbearance. Policy makers are relaxing, the controls restrictions on the housing market, external demand is immensely strong this is not a story that people really focus on, but is, I think is a very important story. Trade surplus is running at 1.1 trillion dollars a year compared to 500 billion in 2019. And current account surplus has also exploded in size.

So external demand is really helping. Now why are we confident that the arrow will converge to the trend in the chart. And that's because China has always had medium term targets and they have actually been successful in achieving targets.

Many of you recall that in 2010, China announced that their goal was to double per capita GDP to 10,000 per person in 10 years time. So from 2010 to 2020, they wanted to double GDP and they achieved that. People didn't think that was possible, but they achieved it.

The next goal that they have declared, is to become the largest economy in the world, surpassing that of the United States, in 15 years. But to do that, they need to grow by 4% a year.

So I am, we are of the view that China is going through a purging, cleansing process to rid itself of a lingering risk in the long run, so that they can be allowed to prosper and grow.

So I see a conversion or reversion back to a trend of about 4, 4, maybe a little bit higher than 4% in the coming years.