Short and Sharp: I like China. (Seriously.)

My constructive view on China and, by association, emerging Asia, has been greeted with some skepticism. I can see why. After all, previous policy tightening aimed at curbing China’s excesses, coupled with the trade war, have weighed heavily on the Chinese economy, with real GDP growth weakening to 6.4% year-on-year in the fourth quarter of 2018, the slowest pace since 2009.

The operating environment has become particularly challenging for corporates – both domestic and international. Disappointing 2018 Q4 earnings results from several large US technology firms and global manufacturers were blamed on weak Chinese demand.

And yet, emerging market funds saw heavy inflows in January. Many investors believe, as I do, that the wealth of stimulus measures introduced since last June will eventually stabilize the Chinese economy.

So far, many of the stimulus measures have not been very successful. Corporates’ and households’ pessimism and propensity to save mean that tax cuts will have been as useful as pushing on a string. In that environment, infrastructure and monetary easing tend to be more successful tools. Yet the credit transmission mechanism in China also appears to have become less effective: last year, bank lending rates failed to decline in conjunction with market rates. However, a weaker policy transmission mechanism argues for greater easing in rates. Chinese rates have scope to fall further and, positively, the Chinese government is duly responding.

The pace of monetary and credit easing has intensified since December and further measures are expected, which should lead to a pick-up in growth this year in Q2 or Q3. Certainly, there appears to be broad agreement that China will continue to ease as much as necessary to meet the government’s growth targets.

Admittedly, those targets are likely to be lowered to around 6%-6.5%. Unlike in 2016, when the Chinese government unleashed massive investment-heavy stimulus and the economy quickly responded, policymakers now have a much greater awareness that, given the heavy debt burden, the economy needs to unwind its excesses. China’s policies are simply aimed at stabilization – not a roaring economic recovery that generates a powerful global revival.

In addition, a strong recovery requires a combination of more stimulus and a resolution in the US/China trade war. With China reportedly offering to ramp up its US imports, a resolution on tariffs may be possible. However, the most important aspects of their disagreement – forced technology transfer and knowledge theft – are unresolved.

So while a third round of tariffs may be called off, I envisage the trade war shifting to a tech war, with the US intensifying its battle via broader restrictions on exports of technology to China and on Chinese investment in the tech sector. This is another reason why I only envisage a stabilization in China and also why I have retained my downbeat view of the US technology sector.

Why is a mere stabilization in growth enough reason to be positive on China and emerging Asia? Simple: valuations are already signalling green. With economic stabilization waiting around the corner, I consider this to be a good entry point to build a long-term strategic position in Asia.

Follow Principal Global Investors on LinkedIn

Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of January 2019. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. This material contains general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Subject to any contrary provisions of applicable law, Principal Global Investors and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in this document or in the information or data provided in this document.

Past performance is no guarantee of future results and should not be relied upon to make an investment decision. Investing involves risk, including possible loss of principal.

International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets.

Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided. Principal Global Investors does not endorse, authorize, or sponsor any third-party content.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given before making an investment decision

Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers. Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.

729891