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Fear is a funny thing. It’s an emotional response to a situation, yet in the markets, many of our worst fears are induced by hard, rational statistics.

In China, a deluge of data appears to prove that the economy is about to collapse. Who can argue with high inflation, slowing industrial production, weakening property sales and power shortages? It’s all in the numbers, right?

I’m not so sure. While there’s no shortage of worrisome statistics, I prefer to look beneath the surface.

For example, our regional analysts aren’t unnerved by weakness in the Chinese auto or steel industries. Both are subject to significant inventory changes that can prompt short-term aberrations. Instead, our analysts look at things like cement production and power generation, which point to solid underlying economic activity, despite recent power cuts.

The point is that newspapers choose the scariest indicators, but investors should look for the most reliable data.

Sometimes I like to “correct” an unreliable indicator to gain perspective. People want to know if Chinese property prices are in bubble territory. Official data on disposable income completely miss the unreported “gray income” that drives much of the Chinese economy. My colleague in Hong Kong, Stuart Rae, showed me an academic study from last year that says real household income in China could be 90% higher than official statistics. Plug that into home prices, and the Chinese bubble looks much less menacing—the ratio of home prices to household income drops from 7.8, based on official income data, to 4.2, based on the gray income data (Display).
 
I’m not saying that homes are cheap in China (neither are stocks, by the way). I am saying that context is crucial. Don’t just look at Beijing and Shanghai—where property prices are the most inflated. This is a country of a billion-plus people. In some smaller cities, property markets are much healthier, yet shares in regional construction companies are being tarnished by indiscriminate fear.

Of course, China faces real challenges. It has too much investment-led growth, too little consumer-led growth, too much state control and a perennial currency problem.

But even if China’s GDP growth slows to a more sustainable 8%–9%, I don’t think the end is near. Yet, since fears of a Chinese collapse echo around the world, I’m on the lookout for value in global stocks that depend on China’s growth, particularly in sectors such as commodities.

Kevin Simms, Global Director—Value Research at AllianceBernstein

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio management teams.