China: Quality over quantity

Investors are adjusting to China’s growing influence on the global economy. Concerns about trade tensions with the U.S. and elevated domestic debt levels are real, yet we see the near-term 
outlook as resilient.

Highlights

• China’s economy is proving more resilient than sceptics have expected. Yet a fine balancing act lies ahead. Recent industrial production and retail sales data have underwhelmed. This comes against a backdrop of progress in implementing reforms, financial de-risking and slower credit growth. A moderate economic slowdown is welcome, in our view, as China downshifts to a more sustainable pace of growth less reliant on credit.
• A full-fledged trade war with the U.S. is a risk to exports. This underscores the importance of the country’s shift to a consumption-driven economy. Improved productivity, higher incomes and government policies that strengthen social security must support this tricky transition.
• The risk of a financial crisis in China is a significant threat to the global economy. Yet we do not see this is as a near-term story. The creation of the Financial Stability and Development Committee and work towards a unified regulatory framework have put authorities in a better position to address financial stability risks.

Snapshot

China’s economy has defied sceptics. The Steady slowdown chart below shows the moderation in activity in the first half of 2018 has been gradual. First-quarter GDP growth beat expectations, helped in large part by still-solid net exports. This could be undermined going forward if trade tensions with the U.S. morph into a full-fledged trade war. Yet the near-term economic outlook appears solid.

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