Positive investment outlook for China predicted at start of Chinese New Year

27 January 2017
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The Chinese New Year is fast approaching (Saturday 28 January), and this time around it’s the year of the Fire Rooster, which last occurred in 1957.

One of five types of rooster, according to the thinking of zodiac signs people born under this animal sign are trustworthy and responsible. Their darker side courts vanity and selfishness, however.

 

But in terms of investing, China has very much been in the spotlight recently. After a volatile and, to many, an unpredictable 2016, some have wondered if what is known as a ‘hard landing’ is on the cards for the world’s second-largest economy. The worry is that after years of massive growth, a combination of factors would mean a slowdown – and considering the economic might of China and how it dominates supply chains, this would send shockwaves across the face of the globe.

To add further uncertainty, Donald Trump has been quick to criticise China, which he sees as devaluing its currency to unfairly favour Chinese exporters as well as having import tax rules that harm US economic interest. There has been talk of a trade war between the two countries, although this is generally seen as sabre-rattling at the most.

Michael Zorko, a fund manager at Schroders, says: “Trump’s surprise election could not have come at a worse time for China. Despite being portrayed as juvenile and inexperienced by the Chinese press, he is being taken extremely seriously by party leaders and avoiding a trade war this year is a particular priority in our view.”

In addition, figures show that China’s economy grew 6.8% in the fourth quarter of 2016, which any other country would be crowing about – and it was even slightly above expectations. And although this was the slowest pace of growth in 26 years, and private sector debt has gone up massively, some see this as China’s economy settling into a more stable groove, which is one of Beijing’s goals.

Craig Botham, emerging market economist at Schroders says: “That we expect a slowdown at all reflects recent policymaker statements on the need for stability over growth, but we have heard these noises before and seen only the slightest of course corrections.”

Investors love to talk about China, and despite uncertainty; many are still enthusiastic about it as a destination for their funds.

 

Ed Smith, asset allocation strategist at Rathbones, says: “We’ve been far less dismissive of President Trump’s protectionist rhetoric than Western markets appear to be. And in his inaugural address, Mr Trump proclaimed that ‘[America] will follow two simple rules: Buy American and hire American.”

He points out that 52% of China’s economy is now in the service sector, and “that is highly likely to be an underestimation, given the poor collection of data from the private sector”. This marks a re-orientating of the country’s economy to more internal drivers, rather than export markets.

This is one of Rathbone’s five reasons to be positive about China, the remaining being:

  • Growth – the slowdown seen in the last quarter of 2015 was the “bulk” of it, and Mr Smith says the “underlying rate of growth has already fallen to within the range at which it is likely to stay for the next ten years”.
  • Debt – as stated before, this is going up at some rate, but Mr Smith believes “it is concentrated in the state-owned sector and issued by state owned banks,” which allows policymakers to have more control over the economy.
  • Consumption – job creation in the service sector has caused consumption to be “more resilient than expected”, according to Rathbones, and household income has improved.
  • Capital outflows – the concern over money leaving China are “repeatedly overblown,” according to Rathbones. My Smith says: “We estimate that 70% of net outflows in 2016 were due to benign or even positive forces, such as an increase in overseas acquisitions by Chinese firms or the repayment of dollar-denominated debt,” which is good for diversification.

 

If you’re considering investing in China, read Moneywise columnist, Darius McDermott’s piece on The Year of the Rooster, which details his top fund picks.

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