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, although there is plenty of scope for the country to command even more sway on the global stage, for example via its ‘One Belt One Road’ and ‘Made in China 2025’ initiatives.
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 we believe it 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 we think it 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 behavior 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.
* Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility owing to differences in generally accepted accounting principles or from economic or political instability or less developed market practices.
Meet the Team
We have a research group for each theme, made up of analysts, portfolio managers and other members of the investment team, that collaborate on new thematic ideas and analysis. Here are the co-leaders in the China influence theme group.
Portfolio manager, fixed income
Global strategist, Real Return team
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 the country’s debt having risen from 136% of GDP to 250% over the last decade. 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 needing to drive 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. Chinese manufacturing is also rapidly moving up the value chain in response to rising wages and the government’s 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.
A Deep Dive Into…
The Chinese property market
More than anything, it is the property sector that has been driving the big swings in China’s economic growth.