China’s economy is critically important – both on a global scale as the second-largest economy in the world, and at a local level as Australia’s largest trading partner. It’s not surprising then, that developments in China are intensely monitored and analysed.
Recently, there have been mounting concerns that a slew of negative developments (tightening monetary conditions, stricter lending standards, slowing property purchases, slower fiscal spending and growing debt levels) could derail China’s economy and that of its trading partners. After all, there is precedent. In 2015, a similar combination of factors sent a shudder through global markets.
Morgan Stanley’s analysts believe these fears are overblown. They point to five factors that suggest 2017 is different to 2015 and the medium term outlook for China is positive.
Strong External Demand
We are in the middle of a global synchronised expansion which is creating solid markets for China’s exporters.
Investments Led by Private Sector
Investment into new capacity has been switching from the public sector to the private sector, which is typically more efficient at allocating capital.
Property Market is Healing
Housing inventory has declined from 33 months in 2015 to 24 months today which indicates unsustainable building is being curtailed.
Some policy measures which are feared – tightening monetary conditions, stricter lending standards and slower fiscal spending – should be seen as encouraging. Given the strength of the economy, this tightening is appropriate.
Debts are Manageable
Nearly all China’s debt is held internally, which makes it easier to manage. And China’s government has healthy foreign reserves which further strengthens its ability to manage its affairs.
What does this mean for investors?
Morgan Stanley believes China is on a solid footing given the context of synchronised global growth and manageable internal challenges. As a result, our analysts continue to recommend clients revisit their asset allocation and focus their attention on international equity markets. We believe better opportunities can be found outside of the ASX and continue to prefer equity markets in the US, Japan, Europe and Emerging Markets.
Speak to your Morgan Stanley financial adviser for more information on how to position your portfolio to benefit from the insight of our award-winning global and local research teams.