In a year when the US economy accelerated, it is worth bearing in mind that it is still China that drove the world economy, delivering an estimated 25%+ of total global growth during 2018.
That is a reality that we'll have to get used to, with a range of estimates forecasting that China will eventually overtake the US as the largest and most influential economy in the world within the next ten years.
Three near-term challenges
But as we move into 2019, near-term challenges, like trade tensions, debt and the sustainability of reforms, dominate the outlook. We don't underestimate the importance or scale of these challenges, but we feel that – properly managed – China still has undoubted potential to grow sustainably over the longer term.
Looking at trade, we estimate US policy measures will slow China's growth to 6.1% in 2019. China's response here will be crucial.
Policy support is coming to stabilize the economy over the short term but China will have to diversify its export markets in the long-term, and new trade deals indicate China's trading future may lie in Asia, Africa, the Middle East and South America, where growth in both the population and middle class will be greatest in the coming years.
Moving onto debt, China's post-crisis debt build-up remains a concern but, unlike in the rest of the world, China has been aggressive about deleveraging and instilling new discipline on credit flows. These steps are encouraging but more work needs to be done to propel China in the future, not least in ensuring that the financial system works not only for the previously dominant SOEs but also for the small-and-medium private enterprises that are the backbone of the economy.
There also remains lots to do on the reform front, but China is making progress, albeit at its own pace. In the past year, we have seen closures of 'zombie' SOEs, easing of urban residency rules, opening of auto sectors to overseas investment, and reforms to rural property rights.
From our conversations with regulators, there's immense desire to push further reforms in the future, and we hope that regulators continue actively to simplify the regulatory framework and promote international standards.
Financial reform continues
Continuing on the reform theme, one area where there has been marked progress is in financial markets, specifically through opening up onshore markets to overseas investors via the Stock and Bond Connect programs.
We believe that these reforms, and the subsequent inclusion of onshore markets in global equity and bond benchmarks, have the potential to spark a rebalancing of global asset allocation to China.
And the evidence shows that this is starting to happen, with overseas investors increasing their allocations to China during the past three years.
This is a significant change both for China and global investors.
Overseas investors' holdings of onshore China assets (RMB Trillions), Jan 2016-Sept 2018