Rising uncertainty may lead policymakers to ‘kick the can down the road’


The trade war has proved to be China’s defining story for 2019 and is likely to remain headline news in 2020, but questions abound regarding a potential economic slowdown for the Asian powerhouse.

However, China’s economic story remains multi-faceted as opinion spans from bull to bear.

« China’s economy faces threats on multiple fronts in 2019 as economic consequences of the multi-year escalation in US trade tensions became evident and stimulus measures struggled to rejuvenate a fraught private sector, » explained Qian Wang, chief economist for Asia-Pacific at Vanguard.

« Although policymakers have modestly shifted the balance of their focus toward protecting short-term economic stability, slowing global economic growth and expectations for persistent US-China trade tensions place China’s economy in an environment of perpetual high policy uncertainty.

« These factors constitute a sizeable headwind for both immediate and medium-term growth prospects. »

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Positive future

Robert J Horrocks, CIO and portfolio manager at Matthews Asia, sees a more positive future for China and the region as a whole: « We believe an objective look at Asia shows that the region may have reached a turning point.

« While the US has been overstimulated by a decade of quantitative easing and, more recently, tax cuts for the upper classes, Asia remains understimulated and, in our view, primed for growth. »

He added that the abundant tensions are not necessarily negative from an investment standpoint, rather « investment gains have often occurred against a backdrop of political and economic uncertainty ».

Anik Sen, global head of equities at PineBridge, explained that the market has perhaps misjudged China’s coming years: « The slightest hint of an economic slowdown in China reverberates across all markets, most notably in global banking and industrial sectors due to their macro linkages.

« While global markets have persistently worried about economic weakness in China since the last slowdown in 2014-15, indicators including export of machine tools and automation equipment to China point to a recovery from its slowdown that began in 2018. »

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Trade war

The trade war has been the big-ticket item for the region for 2019 and with no resolution achieved as yet, it is certain to continue to make headlines in 2020. However, the prevailing opinion is that while it may not be resolved soon, it is unlikely that things will get worse.

« We believe a re-escalation of US-China trade tensions will be avoided, » said Edith Siermann, head of fixed income solutions and responsible investing at NNIP. « Instead, we expect both countries will be incentivised to make small concessions and bring tensions down. »

Horrocks argued that we have given too much credence to the consequences for China, instead suggesting the trade war has only created « a lot of noise but has had less impact on the ground in Asia ».

« Asia’s ability to swerve around some of the tariffs by using trans-shipment through Vietnam and similar ports, as well as its long-term plan for China to shift manufacturing production into Southeast Asia, makes its businesses far more flexible in facing trade frictions than, say, US farmers. »

Jane Andrews, founder & CIO at BambuBlack Asset Management, also noted China’s long-term plans: « A shift in manufacturing and supply chains away from China to other countries in the region has already begun.

« China is looking to source high-end components from Asia rather than the West in order to become less reliant on Western supply chains.

« Moreover, ‘Made in China 2025’ aims to establish China as a manufacturer of higher value-added products and services. »

Matthews Asia: Trade war will not dampen ‘world’s best consumer story’

Slowing growth

Beyond the trade war, and of more concern to some investors, lies the issue of China’s growth slowdown, which is set to affect both debt and equities.

« The slowdown in China’s economy looks set to continue, with lower GDP growth likely the new norm, » said Winston Ke, portfolio manager at First State Stewart Asia IM. « As a result, it has become more challenging for China equity investors to find easy investment opportunities. »

Edward Lam, portfolio manager at Somerset Capital Management, noted the « 15 years of uninterrupted financial expansion and credit growth », while adding that « high levels of debt are not necessarily an issue when an economy is growing, but a cooling economy gives rise to the risk of deteriorating debt servicing capacity ».

He added that « many structural, unrepeatable factors have driven growth over the past two decades », and now China will have to rely on other methods to promote growth « which will be very difficult ».

The answer, according to many, lies in stimulus, although what that will look like is uncertain.

« We anticipate the policymakers’ response will be the same as in the past year, walking the thin line between keeping the country’s debt under control and using targeted fiscal and monetary measures to cushion downside risks, » said Chun-Him Tam, head of fixed income Asia at RBC Wealth Management.

Emerging market investors shrug off China’s debt problem

Vanguard’s Wang took a less positive stance regarding China’s ability to weather both its slowdown and external woes: « Rising uncertainty externally may increase the temptation for Chinese policymakers to kick the can down the road by emphasizing short-term growth stability to the detriment of longer-term financial stability and structural reforms. »

She said: « The result over time will be an increase in the risks of a ‘Japan-style stagnation’ or an ’emerging-market-style instability’ scenario. »

Seema Shah, chief strategist at Principal Global Investors, believes the secret behind China’s success lies in a solution to its trade war with China: « A US-China trade resolution, even just a partial deal which stops further tariffs, will reinforce the wealth of China’s stimulus measures introduced over the past year, stabilising the economy and thereby lifting the emerging Asia region. »



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