Forty years manufacturing change

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China’s structural reforms and their investment implications 

2018 marked the 40th anniversary of China’s structural reform journey. This has been unprecedented in scale, timeframe and breadth of accomplishments. However, the resurgence of US-led protectionist policies has rattled markets, hurt investor and corporate sentiment, and is threating the globalisation process that has lifted living standards in poorer countries over the past several decades.

We see the US-China tensions over trade and technology competitiveness as structural and persistent, with no clear end over the foreseeable future. What implications could this have for China’s four-decade reform process that started in 1978 under Deng Xiaoping? In our view, it will be an accelerator of the reform process.

We identify 22* different structural reforms taking place is China and classify them based on the sector most directly impacted by each reform (government, financial, corporate and household). For each reform, Wenjie Lu, our lead China Strategist, provides his assessment of priority, stage of development and impact on short-term growth. Importantly, we used this same framework to group certain “themes” around investment implications over the next 2-3 years.

Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

*Source, BlackRock as at October 2019

Milestones in China’s 40-year reform journey

Over the past forty years, China’s gross domestic product (GDP) has grown dramatically, from about 2.3% of global output in 1977 to 18% in 20181. In this process, private enterprises went from non-existence to account today for a majority of industrial output, exports and new jobs. Broadly speaking, we can talk of four main stages in China’s opening up to the word, albeit exact cutoffs are debatable.

Reform Evolution

For illustrative purposes only.
Source 1: World Bank, October 2019
Source 2:  PBoC, October 2019

The below table highlights the 22 key structural reforms we have identified and the sector they most directly impact. In addition, it shows our assessment of the priority, stage of development and the likely effect of each reform on short-term growth.

Key Structural Reforms

For illustrative purposes only.
Source: BlackRock, as of October 2019

Overall, reforms fuel institutional guarantees, leading ultimately to developed financial and economic models. Reforms enable investors to pick up structural beneficiaries and build core diversified bond and stock portfolios. The Investment Implications table below presents broad strokes of what we believe is a much more nuanced picture.

Investment Implications

For illustrative purposes only. Source: BlackRock, as of September 2019
Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

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