China - climbing the great wall of worry

After our most recent field trip to China, we have been left more pessimistic on growth, while still believing that the authorities have the resources to avoid a hard-landing. However, policymakers need to maintain discipline and ensure structural reforms materialise.

Despite an evident lack of intention to introduce a more overt and significant stimulus, targeted easing measures are likely to tame the amplitude of the cycle as the economy decelerates. While fine-tuning measures are likely to prop up activity and boost sentiment to some extent, these will be progressively less effective. Equally, structural reform is needed to increase productivity and market efficiency, and to facilitate the transition from an investment to consumptionbased growth model. Without it, the underlying problems will endure.

Politics are critical to the direction of reform and economic growth, with President Xi Jinping seeking to consolidate power in his early years of leadership. The market-oriented reforms necessary for China’s economic transition may conflict with Xi’s agenda. With key-man risk and a greater possibility of policy error, we have turned more cautious on long-term growth.

The biggest area of concern remains the property sector and the extent to which it could destabilise other parts of the economy. Most commentators believe the authorities have the ability to contain the problem in the short-term, but some believe there will be a major – painful – correction at some point. Real estate, shadow banking and local government finances are intertwined
areas of increasing vulnerability.

The domestic experts we met in China are all looking for a slowdown, towards a lower “new normal” growth. That said, the Chinese authorities have the tools to deal with the country’s near-term challenges, but the risks are greater in the long term.


Contents of the full article:

- Politics and reform

- Property market

- Shadow banking

- Local government finances

- Structural rebalancing

- Investment implications


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