Since the early 90s, China has been booming. A state that encourages rather than suppresses enterprise – and a new generation keen to take full advantage of new freedoms has meant a genuine economic miracle. In around 30 years, the nation has become the world’s second largest economy, and looking set to overtake the USA.
Official figures – supported by analysts – showed that growth of 10% was being achieved in China year after year.
It was hardly surprising that many international investors were attracted to China, sharing in businesses that ranged from automotive and aerospace to textiles – with a particular focus on electronics. A high proportion of Apple products are made in China.
But now, something may have gone wrong with the economic miracle. Official figures showed China’s economy grew at its slowest pace since the early 1990s in the second quarter. To put things in perspective, it is still growing. In the three months to June, the economy grew 6.2% from a year earlier. These are the kind of figures that most western economies would envy – but they are a signal that the phenomenal – and up until now completely reliable – growth of the Chinese economy has stalled.
What has gone wrong?
China’s national statistics bureau has saidthat the figures pointed to a “complex environment” both at home and abroad. It went on to state that the economy had “performed within the reasonable range” in the first half of 2019, but that it now faced “new downward pressures”.
It is possible to identify two factors behind these pressures. The first is of course that the country is fighting a trade war with the US which has hurt businesses and weighed on growth. US President Donald Trump has tweeted that his US trade tariffs were having “a major effect” on the Chinese economy. His efforts to Make America Great Again include a focus on bringing manufacturing jobs back to the USA, jobs which his supporters believe have been taken by Chinese businesses.
The figures probably do reflect the impact from the trade conflict. But there is another and possibly more fundamental reason. The Chinese economy may simply have to slow its relentless growth, because it is simply not sustainable – and maintaining this pace of growth might even trigger a meltdown.
The Chinese leadership have been fully aware that their growth was not sustainable for the long term. So have sensible investors.
What does this mean for your investments?
Further growth may be more reliant on domestic demand, especially on consumption, rather than export. However, the Chinese government won’t want quarterly GDP growth to fall much below 6%. Having the brakes put on too fast could derail the economic train.
This means that it is likely that there will be stimulus from the Chinese government. Markets in turn have of course taken that as a decent reason to nudge stocks higher.
What does all of this mean for those who invest in China? Markets will probably be quite relaxed about a gentle slowdown.
But there could still be a possible threat.
If the Chinese government cuts interest rates to stimulate the economy, fine. If they decide to go one step further and devalue the Chinese yuan (or renminbi) it would spark a collapse in consumer goods prices across the globe. Chinese exports would suddenly become very cheap to other countries, and export to Chinese consumers would become very expensive.
Such a devaluation seems unlikely. The yuan is no longer pegged to the dollar, but the currency is managed against a basket of currencies and the US dollar is one of the most important. If the US dollar weakens – as both Donald Trump and the Federal Reserve seem to be aiming at, it could make things easier for the Chinese economy. In any case, the latest figures show that growth perked up in June, as local governments borrowed more money to invest in infrastructure and manufacturing data picked up.
The real danger might be if the trade wars escalate, and politics, rather than economics starts to come into play.
The risks may be small, but at Continuum we believe that when it is your money, you will not want to take any chances. We can help you align your portfolio to what ancient Chinese wisdom might call ‘interesting times’, whatever they hold. Simply call us for the help you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.