Another concern is “old China” companies—steel, coal and other commodities—failing. But that’s not true, either. Revenue growth in old China companies dipped in 2009 and even went negative in 2015 (over devaluation concerns), as the chart below shows.
But today it’s normalized. “New China” companies—such as health care, information technology, travel and Internet—have revenue growth of 25 percent. Old China companies have revenue growth of 19 percent.
Devaluation?
Another concern investors often raise about China is the possibility of currency devaluation. Certainly, the renminbi is stronger than China would like it to be.
But I think central bankers learned their lesson in 2015. Foreign reserves were negative, and China decided to devalue to stop that.
But when it devalued, investors were surprised. Global markets gyrated and shortly after capital outflows exploded, because locals saw the value of their savings was decreasing and wanted to get their money out.
China realized it couldn’t do that again, and has been steadily accumulating reserves for some time. That removes the risk of devaluation, and the renminbi has been appreciating against the U.S. dollar, as the chart below illustrates.
What Bogeyman?
Todd McClone, CFA, partner, is a portfolio manager on William Blair’s Global Equity team.
China will likely see a slight deceleration in GDP growth; forecasts suggest one of 30 basis points, to 6.5 percent, in 2018. But the quality of growth continues to improve as the government increases efforts to reduce financial stability risks and rebound the economy.