By: Richard Turnill
Harvest Exchange
February 27, 2017
China on an upswing
Markets are warming up to China. The sentiment on the world’s second-largest economy has swung in a positive direction—a dramatic shift from just a year ago when the country’s sluggish growth was feared to be a major risk to the global economy.
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The chart above shows that global companies have been getting a lot more positive on China over the past year or so, based on <html><body><u>text mining</u></body></html> of corporate conference calls by BlackRock’s Scientific Active Equity team. It’s worth noting that this is a component of our proprietary <html><body><u>BlackRock GPS</u></body></html> gauge, which is pointing to solid near-term growth in China.
A rebalancing economy
China is starting to reap some benefits from supply-side reform. The reform is helping boost industrial profitability and underpin commodity prices, just as its exporters are getting a lift from the rebound in global trade.
The makeup of China’s equity market is undergoing a transformation as domestic consumption gradually replaces investment as a main growth driver. “New economy” companies in consumption-driven sectors such as technology and services account for over a quarter of China’s onshore A-share market, and more than half of the offshore H-share market. We still see selected opportunities in “old economy” sectors—materials, industrials and financials—as programs to reduce overcapacity and boost profitability are set to expand in coming years. This shift in <html><body><u>China’s growth engine</u></body></html> is also likely to create opportunities for global companies to tap into an expanding Chinese consumer market.
We see a cyclical growth upswing in China underpinning <html><body><u>Chinese and emerging market (EM) equities,</u></body></html> although we are neutral on <html><body><u>EM debt</u></body></html> for now after recent strong performance. We see a breakdown in trade triggered by U.S. protectionism as the biggest near-term risk to China. China’s mounting debt levels are also a concern. We see the risk of a near-term debt crisis as limited, but the problem will only get worse the longer it drags on.