Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast.
The country is also plagued by structural challenges however, most notably the uncomfortable legacy of a massive state-inspired credit expansion in the wake of the global financial crisis. As such, it’s attempting a tricky transition from a credit-fuelled growth model that is overly reliant on investment to one more driven by private consumption and services. It remains unclear how the dynamic between cooling credit growth and supporting GDP growth will ultimately unfold.
The good news is that China’s economy has been gradually but demonstrably rebalancing towards a growth model that is less reliant on investment, with new industries coming to the fore. Our base case is therefore for China to continue to slow down structurally, with growth being supported as necessary by the authorities as they manoeuvre policy settings to bring this about gradually.
We believe this provides an opportunity for investors to gain exposure to companies benefitting from China’s rapidly expanding services industry and fast-growing middle class. We remain cautious on banks given the probability that asset quality becomes more problematic as the cycle continues.
Douglas Reed – Newton, a BNY Mellon company