Headline risks have come thick and fast for China investors this week. The Chinese banking industry is flashing red warning signals, according to the Bank of International Settlements (BIS) quarterly report. President Xi Jinping’s constitutional amendments have raised eyebrows over long-term governance. And the White House is reported to be mulling a wider ban on Chinese imports.
But we see reasons why investors can look past these developments and remain risk-on in China:
- China is making progress in bringing leverage under control. The country’s credit-to-GDP gap, the BIS gauge for banking stress, actually improved to 16.7 in 3Q17, down from 26.4 a year previously. Other progress in reducing financial risk includes the sharp decline in the growth in value of interbank wealth management products.
- More centralized control should help the government to advance financial sector reforms. The merger of China’s top banking and insurance regulators may strengthen constraints on regulatory arbitrage and shadow banking risks.
- China has been mostly conciliatory on US trade irritants so far, limiting the chances of an escalation. The commerce minister’s comment on lower import taxes on cars and other consumer goods suggests Beijing sees room for negotiation.
An escalation of trade frictions remains a risk and we are monitoring developments. But, at present, our baseline case is that trade actions against China will be product specific and have limited macroeconomic impact. This doesn't dim the compelling growth story in China, and we prefer offshore China equities within our Asia tactical asset allocation