Investors should keep a watching brief on the Chinese economy, AMP Capital Investment Strategist, Angus Nicholson says.
He warns that key risks include weak credit growth, the US trade war and signs of slowing global growth.
“Investors should keep a bit of an eye on China this year. China has been a growing risk factor in many investors’ perceptions at the moment.”
But Nicholson says a China collapse is unlikely with the Government rolling out monetary and fiscal stimulus that should continue to stimulate growth.
“The Government has begun to ease monetary policy and they’re looking to further stimulate fiscal policies and that should support growth in the near term,” he adds. “So the threat of a China collapse is still a fairly low probability event.”
In more detail, he explains that one of the challenges facing the Chinese economy is slowing credit and money supply growth associated with the crackdown on off-balance sheet lending which has impacted credit availability for riskier small to medium enterprises (SMEs) more so than larger and safer state-owned corporate borrowers.
That crackdown on off-balance sheet lending has coincided with the Trump administrations’ decision to slap tariffs on some Chinese imports, as well as a noticeable slowdown in global growth, with slightly weaker purchasing manager and manufacturing index numbers coming out for July.
The concerns have helped caused a sell-off in Chinese equities.
The Chinese Government has been responding to the challenges by moving to stimulate its economy as evidenced by the central bank, the PBOC (People’s Bank of China), loosening monetary policy. “The Chinese Government is getting even more concerned and looking to create some more fiscal stimulus measures as well,” Nicholson adds.
AMP Capital is also closely monitoring how the trade tensions with the US develop and how the Chinese currency responds.
Nicholson says investors should be watching for a dramatic weakening of the currency or potentially much larger outflows from China’s capital account. “There is a bit of a concern that there could be a run on the currency. At the moment we deem this quite unlikely, but that’s certainly one of the risk factors investors are pointing to.”
The renminbi has already weakened 10% against the $US so far this year and 6% against a trade weighted basket of its most traded countries.
Nicholson says that has triggered concerns of a repeat of 2015/16 when China devalued its currency and caused a global sell-off in equity markets. But that, too, is unlikely as the Chinese Government has intervened much less this time to help its currency and the concerns that worsened the 2015/16 sell off are absent.
But Nicholson says the weakening Chinese currency does play to the wider trade dispute with the US. He notes that the US initially proposed 10% tariffs on around $US200 billion of Chinese goods, but subsequently upped this to 25% because the weakening of the renminbi almost negated the effect of the trade tariffs.
“This [currency depreciation] further creates ongoing tension with the US,” he says. “The US is keen to stop trade deficits. The problem is if the Chinese currency keeps depreciating the tariffs the US puts on them are largely negated.”
“The big unknown is how much pressure the Trump administration could put on China with regards to the tariff dispute, and that could really impact how effective some of the Chinese easing policies are.”
In the present scenario Nicholson says it is worth keeping an eye on how China’s growth plays out in the second half of the year. But he is confident that monetary and fiscal stimulus will successfully offset the current risks.
“We think that should continue to support China’s growth going forward, for the rest of the year and into next year.”