China has become the world’s second largest economy, the primary consumer of many commodities, and a key driver of global growth. Moreover, China has also been a key source of opportunity for U.S. multinational companies as Chinese monetary and fiscal policy has global consequences.
Being more specific, when investors do look at China, it is tempting to resort to simplistic caricatures that do little to clarify the impact and influence of the world’s second largest economy on their portfolios. This happens because China is sometimes portrayed as an economic juggernaut: the main source of global growth, the lynchpin of the worldwide emerging middle class, and a rebuke to the gridlock besetting the globe’s democracies.
Furthermore, we should underline that while recognizing the limits of available data and the lack of policy transparency, investors must still work to develop a more nuanced view of China. Of course, we must mention that Chinese banks are largely state owned, and the central bank is not independent. Moves in the Chinese stock market are not directly linked to the performance of the underlying economy.
Last but not least, we should emphasize that social financing grew by 13%, which is roughly double the level of nominal GDP growth. Authorities will need to curtail credit growth to prevent debt to GDP rising to dangerous levels. In addition, the real estate cycle looks to have already turned, further undermining investment spend, as the government tightened controls on tier-1 cities leading to a deceleration in housing price growth. However, China already has significant excess capacity and slowing domestic demand increases the temptation to devalue the currency further, which could generate a deflationary pulse into a global economy already beset by disinflation.
For more details on China fiscal and investment law, please do not hesitate to come in contact with Advanced Consultants S.A. and its experts.