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Five key indicators for the Chinese economy

The speed with which volatility originating from China’s capital markets spread across the world in August 2015 demonstrated how important it is for investors to understand developments in China and account for them in their asset allocation strategies. No matter where investors’ portfolios were held, this summer their value was affected by asset-price moves in the onshore markets and policy decisions made in Beijing. In fact, we think that the People’s Bank of China’s move to devalue the renminbi on 11 August was probably the biggest realised tail risk for global markets in 2015, and had wide-reaching implications for investors.

We believe that a major challenge for international investors seeking to understand China is that policy can appear to change rapidly from quarter to quarter, and few of the economic indicators are clear. 

Beijing is taking an experimental approach to economic and financial policy. To maintain stability the government is making small, regular adjustments to various policy levers, even reversing reforms if a policy is not working, or it becomes concerned that a new move might destabilise the status quo. We expect the State Council to favour stability over pushing further reform and market liberalisation until the National People’s Congress meetings in March 2016. Beijing’s focus on stability should help quell some of the market volatility that its incremental policy approach has appeared to export to the rest of the world as investors struggled to understand the implications of changes.

The macroeconomic picture is also mixed. The most recent data has continued on a downwards trend. Indicators like industrial production and manufacturing purchasing managers’ indices pointed towards further growth moderation. But the picture is not universally bearish. China’s consumer, financial, services and technology sectors appear to be growing. But it is still unclear whether these can grow fast enough to take up the slack created by shrinking manufacturing and capital-intensive development in the construction and infrastructure sectors. 

In the long term, we believe that China’s integration into the global financial system will be a fundamental driver of the fortunes of the world’s capital markets. In thinking about the risks that this process may bring to global portfolios, we believe investors need to retain a balanced view: neither underestimating the global impact of the ongoing economic slowdown and rebalancing, nor overestimating the risk of an imminent large-scale crisis of the kind we saw in Western economies in 2008, or in emerging markets in the late 1990s.

Mark Evans, one of our Emerging Market Fixed Income investment analysts, recently travelled to Beijing, Chengdu and Shanghai to get an on-the-ground perspective on China's policy direction and economic outlook.

 

Our Emerging Market Fixed Income team and 4Factor™ Equities team have identified five data series that they think are worth monitoring to get a steer on how China’s economy may evolve over the next six months.

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This communication is provided for general information only and should not be viewed as a recommendation or a solicitation of an offer to buy, sell or hold a security, investment or derivative, or as a recommendation to adopt any investment strategy. No representation is made that any of the services, securities or investments referred to herein are suitable for any particular investor. The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.