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Is the slowing Chinese economy a cause for concern?

2 minute read

Chinese economic activity has slowed over the last few quarters but what comes next and what should investors do?

Who's this for? Confident investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Past performance is not a reliable indicator of future performance.

What you’ll learn:

  • Why China’s economy has slowed.
  • What actions are being taken to stimulate the economy.
  • What the future holds for investors.

There can be little doubt that Chinese economic activity has slowed over the last few quarters. This is evident across the board, from the slump in base metal prices to the earnings of western companies exposed to China. The questions investors should now be asking themselves are, what comes next and what should I do about it?

How slow?

Domestic factors are certainly to blame for at least some of the recent slowdown. Chinese policymakers have been trying to contain some of the risks to financial stability that have arisen from China’s sustained growth over the last couple of decades. The ensuing financial regulations introduced in 2017 and early 2018 have led to a significant contraction in borrowing, most notably among private sector companies. At the same time, trade tensions between China and the US have increased and the global growth cycle has peaked. This has resulted in a more severe slowdown than perhaps policymakers had initially intended.

What next?

Recently, policymakers have attempted to re-stimulate the economy, but the full effect of these actions is yet to show up in the data. One of the reasons for this is the fact that local government officials, who typically implement infrastructure spending and other forms of stimulus, are now facing a number of conflicting pressures. For example, these officials remain accountable for the projects they approve. Perhaps understandably this has resulted in a little more reticence among these decision-makers.

Conclusion

China’s growth and success in reducing domestic poverty in the last few decades has been notable. However, for China to move ahead to the next stage of its economic development remains a significant challenge for a country of its size and complexity.

Finally, with regards to China’s short-term future, we should be wary of overconfidence. This is an opaque economy at the best of times. However, we still see policymakers enjoying sufficient means to keep the show on the road and would expect the economy to brighten somewhat over the course of this year. Trade tensions will not disappear, but a material escalation from here also seems unlikely. In this context, we continue to see emerging market equities as an attractive opportunity for the year ahead. These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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