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.
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