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China will soon be an “inevitable investment” – Wei Yao

02/07/2018

Short-term slowdown will not stop China’s structural improvement, says Lead Asia Economist

China is set to become an “inevitable investment” according to Wei Yao.

Despite short-term uncertainty, the Chinese economy will continue its journey to the mainstream and should play a role in just about all portfolios, Societe Generale’s Lead Asia Economist said last week.

“If you haven’t already started looking at China as an investment, you should do so now,” she added.

China has already made a significant transition from emerging market to the world’s second largest economy. According to Wei, it now plans to become the global superpower by 2050 and, adhering to its principal of prioritising stability over growth, is now prepared to endure short-term pain in order to achieve that goal.

The Chinese government has outlined a planned programme of structural improvements over the next two years. These reforms will cause the economy to slow, leading Wei to forecast below-consensus growth while they are implemented.

But despite the short-term impact, the stated goals of poverty alleviation, reduced pollution, financial deleveraging, dampened housing inflation, and the containment of local government debt, will all contribute to China resuming steady, sustainable growth, albeit at slower rates than it enjoyed previously.

“There will be a slowdown in China, but growth will continue,” Wei said, adding, “Most importantly, the slowing of the economy will be rooted in the best reasons, being largely driven by the Chinese government implementing reforms to improve the economy in the long-term.”

The reforms will counter several negative factors, Wei said. For example, tightening credit conditions have seen increased pressure in the country. However, this has so far been restricted to smaller companies, and the acceleration in bond defaults is not yet systemic.

A backdrop of a stable global environment will allow the reforms’ impact to be limited. Once in place Wei anticipates the headline outcomes to be increased consumer activity, lower deflationary pressures, and a reduced likelihood of the renminbi facing devaluation. The down side meanwhile will be a slight reduction in growth, a fall in investment growth in the country, and short-term financial stress. Overall the reforms will see China emerge as a stronger long-term option, cementing its position as a cornerstone of portfolios, and even becoming a default option for global investors.

Despite these structural improvements however, Wei cautioned that China would never be exactly like the economies of Western democracies. Even if the reforms will lead to the market opening up, the ruling communist party will retain a tight rein over the corporate sector, she said.

Beyond its own borders, China will play a role in the continued progress of Asian markets, which Wei described as “still resilient.”