Just like the gravity defying acrobats in the Chinese State Circus, the Chinese economy is performing a rebalancing act that requires a bold vision and policy dexterity.
Momentum behind the rebalancing process has been slowly building since President Xi Jinping took office in late 2012, though with typical opaqueness from the Chinese government.
In August 2015, a drop in the currency and heightened expectation of devaluation led to global investor panic and in January 2016 the fall in the Purchasing Managers Index (PMI) to below 50, indicating a contraction in activity, had a similar irrational response. We looked through these headlines and saw the services and consumer data was strong and improving. We also expected the government to respond and support the teetering economy. Duly, they did by launching the largest programme of fiscal stimulus since the Global Financial Crisis and provided monetary stimulus through interest rate reduction and by lowering the reserve requirement ratio for banks to encourage lending.
Today, few investors expect a hard landing, and the repricing of this risk is a key factor in driving equity market returns across the region. Over the summer we saw industrial profits up 11% YOY, power consumption up 9% YOY and property sales in August up 25%. With industrial inventory, including steel, shrinking (suggesting lower excess capacity and improving utilisation rates), many indicators are pointing towards a period of relative stability for China’s economy, versus the expectations for an imminent collapse that have twice gripped markets over the last 14 months.
The great re-balancing act will leave behind those investors unable to adapt. We continue to search for exciting new opportunities as the economy moves away from an export focus to domestic consumption and increasing urbanisation. At just 55%, China has the same urbanisation as Japan in the 1950s and the US in the 1920s. So from the unloved property sector to designer sportswear, we’re finding great “next story” companies tapping growth opportunities in ‘New China’- the greatest show on earth.
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