• This 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, heightening the risks to the economy. The ability of China’s economy to move smoothly to being consumption-led is of great global significance. Rebalancing will not be easy but is likely to present attractive investment opportunities as well as pitfalls.

Credit cycle

China’s unprecedently large credit boom left the country’s economy highly leveraged, with clear risks to both domestic and global financial stability. Post 2016, external monetary and geopolitical risks necessitated ‘deleveraging’ as a policy priority, with negative implications for nominal domestic and global GDP growth. Confidence in Beijing’s management of systemic risks relies heavily on its ability to control outbound capital flows.

Economic rebalancing

‘Rebalancing’ is central to China’s multiple interconnected objectives. The urgency is exacerbated by demographic trends that are starting to starkly deteriorate. China’s authorities accept that investment’s outsized and unbalanced contribution to overall GDP growth must fall, with consumption driving future growth. This should see a continuing shift away from manufacturing to consumption as a proportion of GDP, with less reliance on credit-intensive, investment-led growth. Manufacturing is also rapidly moving up the value chain in response to rising wages and government strategic objectives.

Power projection

Increased military spending by China and military congestion in the Indo-Pacific heightens the risk of collision which could severely disrupt supply chains and markets. The US and Europe are consequently likely to onshore an increasing portion of their critical supply chains over the coming decade, with generous subsidies extended to critical industries. This could drive the formation of closer ‘values-based’ trade and investment blocs with attendant decoupling of critical trade, technology and finance.

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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.