China's leadership has instilled Brian Coulton, a Legal & General Investment Management economist, with confidence that it can successfully transition to moderately slower growth.
One reason for this is that global capital flows are unlikely to restrict China’s monetary policy choices, he says, in contrast to other emerging markets.
China’s outlook is seen as crucial to the direction of the world economy and particularly emerging markets, with commentators struggling to predict either a hard or soft landing. In extreme cases, a slowdown could cause a major systemic shock. This is a view put forward by Robbert van Batenburg of Newedge.
Coulton acknowledges risks, such as the rapid expansion in the shadow finance sector in China and the potential for non-performing assets to emerge in the banking system.
But Coulton sees three reasons that support the argument for China achieving a gradual slowdown in growth and averting a large macro shock.
Deleveraging pressures in the economy as a whole are not intense, Coulton says. He adds that there is also flexibility available in implementing macroeconomic policy measures, and says there is already evidence that some structural reforms are starting to take effect.
The overall level of debt is not excessively high by international standards and is mainly funded domestically, Coulton says. A huge surplus of savings in the household sector is more than sufficient to fund the borrowing requirements of corporates, and although the interest burden faced by the corporate sector is rising, it is still relatively low.
“While policy choices are more constrained than in the past the Chinese authorities still have the option of easing monetary policy. In contrast to some emerging markets, China is unlikely to see its monetary policy choices restricted by swings in global capital flows. This flexibility should help to smooth the path towards lower growth,” says Coulton.
He says last November’s Third Plenum meeting set out a strong agenda with the aim of reinvigorating the role of the private sector in the economy, increasing market pressure on state-owned enterprises and encouraging the rebalancing of the economy towards the consumer and service sector.
Asset management chief executives at a number of Chinese investment managers broadly support this view. They took part in a Funds Europe roundtable in Beijing recently, which will be published in the July/August edition of the magazine.
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