A More Constructive View of China

Global Series: ChinaPioneer Investments Economist, Qinwei Wang shared his thoughts with followPioneer.

Recent developments have suggested that growth momentum in China has been holding up relatively well, while there are increasing signs that policymakers are accelerating their efforts in structural measures.

As a result, we are turning slightly more constructive about the outlook for China over the next couple of years, although we still expect growth to be lower and risks pertaining to the management of its comprehensive multi-year structural transition to remain.

China’s Economic Activity Holding Up Relatively Well

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Sources: Pioneer Investments GAAR, CEIC, as of September 20th, 2016.

Growth in nominal terms is likely to pick up further after a rebound in H1. We expect China’s Producer Price Index (PPI) y/y inflation to turn positive by year-end, for the first time since February 2012. This should translate into faster growth in nominal GDP as well as corporate profits.

This seems to have been helped by relatively more effective fiscal supports than last year, with more infrastructure spending through the central government budget and policy banks. There appears to be space for more fiscal supports if needed, which implies mini-cycles ahead could be less painful than widely expected.

Meanwhile, capital outflows look to be under control so far.

The new mechanism in the Renminbi (RMB) reference rate seems to be working relatively well to help manage expectations.

Signs of a Shift in Policy Focus

With economic conditions stabilizing and tail risks under control, there are increasing signs that policymakers’ focus has been shifting back to structural issues. Recent developments include the announcement of the Shenzhen-Hong Kong Connect, further easing of QFII/RQFII[1], the announcement of fiscal measures to support “people-centred” urbanization, the release of guidance on fiscal reforms to rebalance the revenues and responsibilities between central and local governments, and the establishment of two Singapore-style national asset management companies.

Our reform tracker has shown that China has continued to make progress on structural reforms, despite popular doubts.

Thanks to a less disruptive Brexit, we have revised up our forecasts for China’s growth for the next couple of years. We now expect official GDP could stabilize around 6.7% this year, drop slightly to 6.4% in 2017 and 6.2% in 2018, compared with previous post-Brexit forecasts of 6.5% in 2016, 6.1% in 2017, and 5.8% in 2018.

Nonetheless, we remain relatively cautious as, in addition to uncertainty from overseas, policymakers could still make mistakes in managing this comprehensive transition, as has been illustrated over the past year or so.

The major near term risks include:

  1. Property prices: if property prices continue to pick up and expand into wider areas, despite recent policy tightening by individual local governments, there could be danger of policy tightening at a national level, which could hurt the wider economy. So far, we expect more regional tightening to come, with a shift of monetary stance still unlikely.
  2. Surprises from the US election or the Fed: the US election might result in a major shift of American policy, including international trade. If this happens, it might have a significant impact on China and the region, who have been major beneficiaries from globalization.

Investment Implications for Multi-Asset

We continue to remain relatively optimistic on Emerging Market (EM) equities in general, although we particularly  like China and India. In China we have upgraded our positive assessment of the broad economy, not just the “new economy” sectors. However, we are conscious that EM economies might be under pressure if the Fed starts hiking rates.

[1] Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII) Schemes
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