In China, government policies, rather than GDP numbers, tell us most about markets
- Hannah Anderson says in trying to balance the need to support the economy with the need to control systemic risks, Beijing is using a mix of monetary and fiscal measures that investors should watch closely to gauge the health of the economy
“Crosscurrents” seems to be the buzzword for global markets in 2019. And one of the oft-mentioned risks for 2019 is the ongoing slowdown in China.
Crosscurrents is also an apt descriptor for what is happening within the Chinese economy. On the one hand, the government aims to support the economy. On the other hand, the importance of controlling systemic risks limits the use of old tools.
Policies enacted throughout 2018 are likely to provide diminishing support for the economy – to be clear, growth looks unlikely to crater, but it may slow further – meaning authorities are likely to either introduce new measures or more aggressively pursue existing policies.
China’s government seems comfortable with modestly lower growth. Official commentary has suggested real GDP growth may hit 6.3 per cent for 2019, with the potential for even lower growth in the first quarter. It is worth keeping in mind that even if growth were to fall to 6 per cent, for example, the additional output generated would equal 5.1 trillion yuan (US$753 billion). A decade ago, China’s gross domestic product would have had to expand by 14.1 per cent, almost double the rate China was growing at the time, to add that much output.
Economic policy operates on two different tracks in China: monetary and fiscal. Much attention has been paid to monetary policy lately.
The already high levels of debt in the corporate sector, the People’s Bank of China’s long-term focus on financial stability, and its ongoing efforts to reform China’s financial plumbing, by relying on rate tools over quantity-targeting measures and by standardising the private sector’s access to credit – all limit how far China can walk down the monetary track. And aggressive easing may even be counterintuitive.
Yet, macroeconomics determine the fate of markets in China to a lesser degree than other markets. US nominal GDP growth and price changes in the S&P 500 are 2.3 times more correlated than Chinese growth and the CSI 300, though neither exhibit a particularly close relationship.
Growth certainly has an impact on sentiment, and investors watch government policy closely, but the overall rate of growth will tell us little about onshore equity performance versus what we can learn from the way that growth is achieved. As a consequence, while China’s rate of growth will remain on the list of concerns, the crosscurrents of China’s different policy measures will be top of the list of factors to watch within China.
Hannah Anderson is a global market strategist at JPMorgan Asset Management