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Press, Journal Article
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PRICE POINT
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A much more likely outcome is that we see
an “ever
-
greening” or a rolling over of bad
debt over the next few years, given China’s
unwillingness to let financial firms fail, its
emphasis on stability, and its huge current
account surpluses and foreign exchange
reserves.
There is the risk that avoiding the pain of
deleveraging swiftly and kicking the can
down the road will exact a heavy toll on the
economy longer term.
That is one reason why we expect growth to
continue to slow unless China enacts more
transformational reforms that will improve
efficiency and productivity in the economy.
THE STOCK MARKET AND CHINA
LEADERSHIP
Despite a decline of 45% in China’s
Shanghai Composite Index last summer,
China was one of the better-performing
regional stock markets last year, with a gain of 9.4% in U.S. dollars, based on FactSet data. However, the steep
decline at the start of this year reflected renewed fears about China’s economy, currency, and management.
So far this year, the government has had to reverse policy and suspend newly installed circuit breakers that shut
down the market twice in one week. There is no doubt that Chinese policymakers are struggling to balance state
control with more market-driven pricing mechanisms.
It is important to remember that China alone is not to blame for the turmoil in global equity markets early this year.
Investors are also concerned about U.S. and global growth, the declining oil price, the outlook for corporate
earnings, and the Federal Reserve’s move to finally begin
raising interest rates.
OPPORTUNITY AND OUTLOOK
Despite the turmoil in China’s stock market, we continue to find attractive companies where the long
-term benefits
should outweigh the near-term risks. One key area of focus is disruptive technology. In
vesting in some of China’s
high-growth Internet stocks has been very profitable.
We also find opportunity in the consumer and service sectors, with Chinese consumers moving up the value-
added curve, buying more expensive, higher-quality items. In the services area, health care and logistics offer
promising opportunities. We also see potential in reform beneficiaries
—
state-owned enterprises that should
benefit from change in government policy over the next few years.
Recent events do not change our longer-term view on China or the rest of Asia. We expect the China market to
offer attractive growth opportunities for many years to come. Also, the structural growth story in Asia remains
robust. Economies are growing at healthy levels in a global context, supported by large, often young populations
that are moving up the income curve.
As we get more clarity on China’s currency framework, we expect volatility to subside, allowing investors to focus
on the more positive features of the China and Asia story once again.
Figure 2:
China Real GDP Y/Y%
A Sharp Slowing in Economic Growth
Sources: Bloomberg and China National Bureau of Statistics. As of January 2016
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
2010 2011 2012 2013 2014 2015 2016
latility
E
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