What’s next for China?
China’s increasing importance in the global economy has been accompanied by its rising influence and assertiveness in regional politics in a clear challenge to US hegemony. This is likely to see mounting political tensions between China and both regional and global powers, making it one of the key considerations in current geopolitics, and absolutely vital for investors to understand. The influence of China on the global economic and capital-market outlook is far greater today than in the past, though there is plenty of scope for China to command even more sway on the global stage, with the ‘One Belt One Road’ and ‘Made in China 2025’ initiatives making clear that China is only at the start of its campaign for global dominance.
A balancing act?
China’s increased economic influence is evident in the country’s consumption share of a range of commodities, the increasing impact of Chinese political views, and the competitive threat from Chinese businesses. The robust growth rebound through the global downturn was supported by a state-inspired credit expansion of unprecedented scale, making the economy more risky. The ability of the economy to move safely to a consumption-driven growth model is of great global significance. Rebalancing will not be easy, but is likely to present attractive investment opportunities as well as pitfalls.
Brace for impact
China’s unprecedented credit inflation has left the country’s economy highly leveraged and poses a clear risk to both domestic and global financial stability. In many ways, China’s financial system today is more complex and opaque than the balance sheets that constituted the US sub-prime mortgage crisis and led to the 2007-8 global financial crash. For these reasons alone, China is worth paying attention to.
China has a key role to play in the changing global population dynamics, with its rapidly expanding middle class and the world’s largest population. China will also be critical in achieving any kind of meaningful global climate action, and will influence the behaviour of consumers around the world. For us, China is one of the most important economic forces in the world today, making it essential that we incorporate all we know about this powerhouse into our investment decisions.
Our key areas of focus
China’s unprecedentedly large credit boom poses a clear risk to both domestic and global financial stability if not controlled well. Both the speed of the expansion and the proportion of ‘off-balance sheet’ credit are concerning, with debt having risen to 270% of GDP as at 31 December 2020. This is slightly offset by the greater power of government to coordinate banks’ actions, which is being reflected in rising policy efforts to control the financial system, notably in the shadow banking segment.
China’s authorities accept that investment’s outsized and unbalanced contribution to overall GDP growth must fall, with consumption driving future growth. This will see an ongoing shift away from manufacturing to consumption as a proportion of GDP, with less reliance on credit-intensive investment-led growth. Chinese manufacturing is also rapidly moving up the value chain in response to rising wages and government strategic objectives. Additionally, China’s current-account surplus is moving towards deficit as domestic consumption growth exceeds that of the country’s trading partners.
China’s increasing importance in the global economy has been accompanied by its rising influence, and assertiveness, in regional politics in a clear challenge to US hegemony. This is likely to see mounting political tensions between China and both regional and global powers.
Of course, our themes don’t exist in a vacuum
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These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Please note that holdings and positioning are subject to change without notice.