Risks and Challenges of the New Growth Package
The new plan, directed at the economy’s supply side, focuses on cuts in taxes and other imposts to help businesses compete. It also sets aside money to cover the cost of redundancies in industries—such as heavy manufacturing in the country’s north east—that are suffering from overcapacity.
In other words, China is taking the extremely risky step of starting major supply reform at a time when local and global economies are weak.
The government expects to support this structural change with public spending, and by transferring non-performing bank loans on to its own balance sheet. It will do all this while supporting growth and moving the entire economy up the value-added chain.
This is challenging, to say the least—for China and, potentially, other emerging markets and the developed world. We think investors should take note and review their research strategies to ensure they are appropriate for what we see as the next chapter in the China story
Research Settings Need to Be Granular, Not General
From an investment research perspective, we think the focus should now be on monitoring closely the trajectory of China’s economy. This trajectory is likely to remain volatile, in our view. Investors should also understand its linkages to emerging and developed economies.
The effects will not be evenly distributed. The linkages between most Asian emerging economies and China are based on geographic proximity and broad trading relationships. But links between Latin American countries and China exist mainly through commodity prices. Linkages between China’s economy and the emerging economies of Europe, the Middle East and Africa are more mixed.
Investors will need to think carefully in terms of specifics—not generalities.
For example, they should identify how these linkages will lead to pockets of value, whether to invest regionally or globally, whether to favor equity or debt, what the effect will be on currencies, and where China sits at any given moment in its policy and economic cycles. The focus should also include the potential of these risks and opportunities to affect developed markets.