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What’s next for China’s economy

16-Okt-2017
By BlackRock Investment Institute, Richard Turnill

Key points

  1. We see China’s growth edging lower next year but expect it to slow to solid and more sustainable levels supportive of emerging markets (EMs).
  2. Equities rallied, despite geopolitical noise. Japanese stocks hit their highest level since 1996. Eurozone industrial production came in strong.
  3. A coalition victory for the incumbent party looks likely in Japan’s Lower House election this week. US third-quarter earnings season picks up.

What’s next for China’s economy

China’s growth is set to cool in 2018 after a surprisingly strong year, and economic risks are rising. Yet the key party congress this week will likely serve as a prelude for deeper reforms. We see still-solid growth in China underpinning EM assets.

Chart of the week
Emerging market equity earnings and China imports growth, 2005-2017

Chart of the week

Sources: BlackRock Investment Institute, with data from Thomson Reuters and National Bureau of Statistics of China, October 2017.
Notes: Emerging market earnings are based on the annual change in aggregate analyst 12-month earnings-per-share forecasts for the MSCI Emerging Markets Index. The China imports line shows the annual change in the three-month moving average of the value of imports into China.

China’s growth acceleration (reflected in strong domestic demand in import data above) helped foster this year’s EM recovery, boosting EM earnings growth and equity outperformance. China’s recovery also coincided with a near perfect set-up for EM assets: a weaker US dollar, falling bond yields, rising commodity prices and a more synchronized global expansion. Our BlackRock Growth GPS for China still points to steady growth in 2017. Sustained, above-trend global growth also helps underpin China’s key exports. China’s growth may come off slightly in 2018, but we expect growth at levels that should still be positive for EMs and risk assets globally.

Prioritising reform

The road ahead for China and EMs may be bumpier than this year. Chinese President Xi Jinping is widely expected to shake up the ruling Politburo and bring in more allies at the twice-a-decade Communist Party congress that sees a reshuffling of most officials. This will give Xi greater sway to chart the country’s course over the five years of his second term. He is likely to speed up work on his key initiatives: further cleaning up bloated state-owned enterprises and delicately cutting down on the country’s reliance on debt to boost growth. Supply-side reforms played a role in this year’s surprise Chinese economic rebound that boosted commodity prices and industrial profits, lifting growth back near a 7% annual pace. Some of that one-time boost has faded. Yet supply-side reforms, coupled with tighter environmental regulations, are spreading to a wider range of industries plagued by overcapacity.

The risk to our thesis is a sharper slowdown once the desire to prop up growth and ensure a smooth party congress begins to fade. Bank lending and credit are cooling – the result of a healthy move to crack down on shadow banking and leverage. Trade relations with the US may come under strain, in part due to the tensions with North Korea, and hurt exports. Regulatory moves to take some steam out of the frothy housing market may cause a downturn in construction activity. A rebound in the US dollar could spur renewed capital outflows and put the People’s Bank of China in a tricky spot managing the currency and economy. This all comes as China attempts to shift its growth mix to one that is more consumer-led and less reliant on infrastructure investment. Our bottom line: We believe China’s growth rate will slip to still-solid and more sustainable levels. That should remain a positive for EM assets and risk assets, even if the sailing is unlikely to be as smooth ahead.

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  • Minutes from the Federal Reserve’s September meeting revealed a committee torn between disappointment in inflation and a desire to proceed with monetary policy normalization. Core US inflation rose less than expected last month.
  • Global risk assets rallied, looking past geopolitical noise. Japan’s Nikkei Index hit its highest level since 1996, while European stocks reached 10-year highs. Major US banks beat on earnings and revenues, but shares fell amid higher-than-expected loss provisions.
  • Eurozone industrial production exceeded expectations in August. Italy’s data were particularly strong. Spain gave Catalonia a deadline to retract its independence claim. Mexican assets came under pressure amid NAFTA talks.

 


Date: Event
Oct. 17-18 US industrial production, Beige Book
Oct. 18-19 China Party Congress, retail sales, industrial production, Q3 gross domestic product
Oct. 22 Japanese Lower House election

Companies representing 15% of S&P 500 Index market capitalization will report third-quarter earnings this week. Results in many sectors are likely to reflect the impact of recent hurricanes, so management guidance will be in focus for assessing corporate strength. Opinion polls suggest the most likely outcome of the Japanese election is a victory for Prime Minister Shinzo Abe’s incumbent LDP party in coalition with the Komeito party – and the party may even retain its two-thirds super majority.

Richard Turnill
Managing Director, ist Global Chief Investment Strategist von BlackRock
Richard Turnill ist Global Chief Investment Strategist von BlackRock. Davor war er Chief Investment Strategist von BlackRocks Fixed Income und active Equities ...

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