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.
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.