China’s raging bull yet to show cracks in armour
OVERALL, THERE IS A SENSE OF STABILITY IN THE COUNTRY THAT IS NOT FOUND ELSEWHERE
One day, in the nottoo-distant future, China will become the biggest economy in the world. Its journey has sometimes been fraught, as an ostensibly communist country interacts with the “free markets” of the West. In the past, that has seen China perennially cited as a risk to any bullish positioning. We believe that this is no longer the case.
We understand that there are palpable risks at play, but we continue to see decent growth across regions, even if the pace and sustainability of that growth is now desynchronised. In other words, we remain “risk-on”, and that is partly down to our view on China.
Right now, everything looks rather positive. On April 17, China published first-quarter growth in gross domestic product (GDP) at 6.8 per cent, slightly ahead of consensus estimates and driven by strong domestic consumer demand. It was achieved on the back of robust real estate investment and retail sales numbers. Inflation is under control, indicating that growth is not, for now, causing any worrisome overheating. The Producer Price Index (PPI) for March was up 3.1 per cent against 3.7 per cent in the previous month. Consumer prices showed a similar trend with CPI up 2.1 per cent in the month after 2.9 per cent in February. Both numbers came in below estimates, but the likelihood is that New Year disruption and a longer-than-usual National People’s Congress conspired to make this a temporary blip.
Debt levels
There are some concerns over debt levels. At the macro level the International Monetary Fund (IMF) has warned that China’s debt-to-GDP ratio could reach 90 per cent in five years’ time. But much of the growth here has come from debt that state-owned companies owe to state-owned banks, which you can argue forms part of a grand strategy. Household debt has also been on the rise. However, we view the large volume of domestic savings to be a good protection against associated risks.
Overall, there is a sense of stability that is not found elsewhere, in Europe or the US. And stability in growth and prices is ■ also evident in monetary policy and, of course, in politics.
Our favourable view is also encouraged by China’s measured response to what could have been (and, in fairness, might yet be) a rancorous trade dispute with the US and its President Donald Trump. Concessions have been made on foreign ownership restrictions in the financial and auto sectors and the rhetoric has been soothing on intellectual property, but tariffs have also been slapped on a basket of US goods. These include a 179 per cent levy on sorghum grain, in a move that some have noted targets key voters just as Trump prepares for midterm elections. There remain risks in this scenario for China, of course. However, the impression has been left that China is willingly making concessions it was always prepared to make, while simultaneously, and successfully, asserting its strength.
In short, our baseline scenario is for a volatile journey but an ultimately benign destination in the ongoing trade ‘talks’. That, and China’s economic resilience, help to underpin our bullish view on commodities. A period of assertive growth from China acts as a useful backstop to that view.
And word.
China has made no secret that it covets a central role in global affairs, and has clearly identified an opportunity while the US meanders towards a form of “protectionism-lite”. China has overtly pursued a “soft power” policy since the time of President Xi’s predecessor Hu Jintao but it is the vast Belt and Road infrastructure project that is the most visible sign of this ambition.
This is a driver for growth in China and bolsters our case that emerging markets will outperform too, but it also adds weight to our relatively bullish case for Europe. In the meantime, we have also favoured trades that aim to offer some protection to client portfolios, including a sustained long position on the JPY and a positive allocation towards convertible bonds, which offer an asymmetrical return profile.
China has made much of its plan to move to a “quality not quantity” mode of growth. That should maintain that kind of stability and direction from which investors can unearth good opportunities, while Beijing looks forward to the moment when it finally supplants the US at the top of the GDP tree. assertive is the right
■ Stephane Monier is Chief Investment Officer, Lombard Odier Private Bank.