China: A Global Source of Risk or A Global Stabilizer

China’s economy is unique in the world for being both enormous and also rapidly and relentlessly growing. Like a jumbo jet with fighter plane performance, the Chinese economy can have a massive impact for good or ill far beyond the country’s borders. Several times in the past two years, policy shifts and missteps in China have brought volatility to what had been mostly placid markets. So is China at present a looming source of potential volatility or a bulwark of stability and counterweight to destabilizing forces elsewhere?

The good news for investors is that in the short term at least, China is a source of both macroeconomic stability and positive global risk sentiment. A variety of factors are contributing to China’s positive contribution to the benign conditions that have characterized global markets for most of the past 12 months. State-owned enterprises and other firms alike have reduced excess production capacity which has pushed up producer prices and shored up domestic revenues and profits. The weaker US dollar has also reduced pressure on the renminbi and boosted external liquidity. Above all, though, the greatest contributor to stability from China is the determination of its policymakers to maintain the momentum of economic growth even while they weed out pockets of excessive risk.

For China’s leaders, growth remains their top priority. They view it as indispensable to domestic stability, and a stable domestic environment in China also contributes stability to the global economy. The question is whether and how China can continue to sustain growth in the longer term. From the perspective of the Chinese government, it must and leaders have made sustaining growth a priority. At the 2010 Communist Party Conference, then-premier Hu Jintao announced the government’s goal of doubling GDP and household income by 2020. Achieving that goal would require GDP growth of 6.5% each year in the remaining years of this decade. Initial progress toward that goal was steady and strong thanks to China’s well-established role as an exporter of manufactured goods and expanding domestic consumption. Since then however, China’s policymakers have been challenged by changes in both the Chinese and global economies. Export growth has slowed, asset price bubbles have arisen and capital has flowed out. Despite these challenges, China’s policymakers are showing that they remain able to steer their country’s massive economy. They have imposed strict capital controls to limit the liquidity drain which has become a policy headache. They have also tightened property market regulations in some cities and price increases are slowing. Finally, stricter regulations on shadow banking and interbank borrowing are cooling risky, and leveraged, lending practices.

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The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and BNY Mellon subsidiary.

 

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