Behind China's slowdown

Thought of the day

by Chief Investment Office 18 Oct 2019

The Chinese economy grew by 6.0% y/y in the third quarter, the weakest pace of expansion since quarterly data became available in 1992.

But while a near three-decade low in growth makes for disconcerting headlines, behind the topline figure the picture is more nuanced with indications that policy support has started to take effect.

  • The weak GDP figure masks tentative signs of improvement at the end of the quarter. September industrial production growth unexpectedly rebounded to 5.8% y/y, from a 27-year low of 4.4% in August. September retail sales growth improved to 7.8 % y/y from 7.5% in August.
  • Soft manufacturing and property investment is being offset by rising infrastructure investment, on the back of fiscal stimulus. January–September Fixed Asset Investment (FAI) growth slowed further, to 5.4% y/y from 5.5% in August, with manufacturing FAI growth falling to 2.5% y/y from 3.6%. But infrastructure investment increased to 4.5% y/y year-to-date from 4.4%.
  • Policymakers have stepped up support, which was reflected in September's firmer Total Social Financing growth data, and which should continue to cushion the slowdown. We expect another 50bps–150bps of cuts to general reserve ratio requirements later this year. Fiscal support will continue too, though the expansion will be modest given the need to balance stabilizing growth against constraining local government debt.

Overall we maintain a cautious stance in our global tactical asset allocation. Signs of stabilization in China activity data for September are encouraging. The tone of US-China trade talks has improved in recent weeks, culminating in the handshake deal reached earlier this month. That said, we still see ongoing downward pressure on the Chinese economy given subdued manufacturing activity, contracting trade growth, and lingering US-China trade tensions. Chinese GDP growth should come in around 6% y/y in 2019 and 5.5% y/y in 2020, in our view. Overall we maintain a modest underweight to equities. Within our Asia portfolios, we continue to prefer offshore Chinese equities. MSCI China is trading near 11.5x 12-month forward earnings, which is close to the long-run average since 2006 and relatively cheap on a regional basis.

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