Balancing Growth, Risk and Opportunity in China
By Aidan Shevlin, Managing Director, Head of Asia Pacific Liquidity Fund Management, J.P. Morgan Asset Management
In this month’s Executive Interview, Helen Sanders, Editor talks to Aidan Shevlin from J.P. Morgan Asset Management, about the changing investment conditions in China – evolving from a period of uncertainty and currency devaluation to a more steady state albeit with some challenges still in place for corporate investors.
How would you characterise the investment landscape in China today compared with 12-18 months ago?
2016 was a year of negative economic headlines in China, and a rapidly weakening currency. This led to significant concerns amongst foreign multinational corporations, particularly given low on-shore RMB interest rates and increasing credit risks. As such, the trend amongst many was to move money out of China wherever possible. During the second half of the year, the government introduced modest fiscal and monetary policy stimulus, as well as tightened capital controls, which led to greater stability and successfully averted an economic crisis. Although the currency continued to weaken during this period, it did so at a slower rate than we had witnessed during the first half of 2016.
To date, the economic growth has picked up in 2017, with strong momentum in China’s GDP figures and other key economic data, reflecting a broad-based improvement on the position of 12-18 months ago. Unlike other countries in Asia, China has actually tightened monetary conditions, which has resulted in greater stability, as well as an appreciation of the RMB, which many market commentators did not expect to happen.
Although the picture is much improved, what key challenges in China should corporate investors be aware of?
Five key challenges that corporate investors in China should be aware of include:
1) Balancing growth and economic stability
In the coming autumn, the Communist Party Congress will confirm the country’s leadership for the next five years, and it will be important that this decision is made in the context of a stable economy. Although China has benefited from economic tailwinds and an improvement in both global and domestic growth, the focus on stability may result in a slowdown in growth as the country is not making use of all its economic levers; some evidence of this includes the focus on curtailing lending, curbs on the housing market and cutting policy rates – all factors which contain growth. However, while China’s current economic growth may be slower, the stamina of this growth remains robust.
2) Ensuring currency stability
The extended period of RMB appreciation is now over; during 2016, the RMB was devaluing at a rapid rate – up to 8% year-on-year at one point and 6.5% overall during 2016. Meanwhile, from a peak of US$4tr, Chinese foreign exchange reserves dropped by over US $1tr, raising concerns about escalating capital outflows. Logically, currency appreciation could never be sustainable over the long term, particularly as interest rates fell, the economy slowed and the US economy experienced growth, however, the pace and degree of currency devaluation did come as a shock to market observers.
2017 has brought some respite with the currency unexpectedly appreciating versus the US dollar. This has been highlighted in the Chinese government’s promoted use of the new Foreign Exchange Trade System (CFETS) RMB Index which values RMB against a basket of currencies and therefore provides a more holistic picture of currency performance. In addition, as economic concerns dissipate, investors have become more comfortable with increased two-way volatility, and as a result, capital controls have slightly loosened.