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Trump, trade and the ongoing transition to a ‘new’ China. What can we expect from China in 2017 and what effects will potential changes in the world order have on developments there?
“Risk, uncertainty but also some opportunities.” This is how CIO China and lead portfolio manager of the Robeco Chinese Equities fund, Victoria Mio sums up the impact of the forthcoming Trump administration as far as China is concerned. “The two main issues are renminbi depreciation and trade. But despite his harsh words, Trump has given rather mixed signals,” says Mio.
Although he has vowed to slap a 45% tariff on Chinese exports to the US and has labeled China a currency manipulator, she is not unduly concerned. “18% of China’s exports go to the US, for example, and a large proportion are consumer related, so applying punishing tariffs could backfire, contributing to inflationary pressure in the US.”
Mio agrees some anti-dumping charges could be applied but these are more likely to occur in the industrial arena, on steel, for example. In addition, any steps taken by the US could result in Chinese retaliation.
‘Applying punishing tariffs could backfire on the US’
She also rejects the currency manipulation argument, giving several reasons for the current renminbi weakness. “It is more a question of dollar strength – some other emerging market currencies have depreciated even more – while the renminbi’s performance against a basket of currencies is actually quite stable.”
US economic strength is making a year-end rate hike increasingly likely – something that is also reflected in global bond markets and the relative US dollar strength. According to Mio, China has actually been trying to prop up its currency in response to capital outflows from renminbi-denominated assets.
Mio’s views echo those of the Chinese leadership, whose response seems to be pragmatic. In his congratulatory words to Donald Trump, President Xi Jinping emphasized the global role and responsibility of both countries. The contrast in the two leaders is also interesting, Mio points out: “Under President Xi, China has become more outward-looking.”
Trump has also announced that the US will quit the TTP (Trans-Pacific Partnership), a trade agreement that excludes China. “This could indirectly reinforce China’s position in the region making way for the RCEP (Regional Comprehensive Economic Partnership), a new trade group backed by China of which the US is not a member. It also supports the ‘One Belt One Road’ policy, an initiative focusing on connectivity and cooperation between China and the rest of Eurasia,” adds Mio.
Mio is upbeat on the Chinese economy. “Underlying economic data is improving and top line growth is stable. What is important is where this growth is coming from: it is consumer-driven, with the proportion of consumption expenditure increasing and the services sector’s contribution to GDP now exceeding 50%.”
She forecasts GDP growth of 6.5% for 2017, around the same level as for 2016. China is also moving out of a deflationary scenario. “The central bank has become less dovish and is likely to maintain a bias towards tighter policy. Rising bond yields and dollar strength underscore that this shift right now is more market- than policy-driven.”
‘Proportion of consumption expenditure is increasing’The government is also taking steps to ensure more even growth in urban infrastructure investment and has made funding more readily available with its PPP (Public Private Partnership) initiative. “This is important as it enables the less wealthy provinces in western and central China to finance urban infrastructure projects and strengthen their financial base. It also addresses the issue of regional disparity” explains Mio.
Next year the composition of both the Politburo Standing Committee and the State Council are likely to change. Mio: “A more reform-minded younger generation will most likely take over. This means that President Xi is likely to maintain the status quo until the fall of 2017.
“Corporate sector debt levels are a cause for concern, but there is no imminent crisis,” says Mio. “The government balance sheet is very healthy and there are adequate buffers. In the corporate sector, the borrowers with the highest debt levels tend to be state-owned enterprises, which can fall back on government support, while private businesses have been reducing leverage levels.”
As far as the property market is concerned, Mio acknowledges that property prices in the four Tier 1 cities have reached bubble proportions. However, low household borrowing levels and rising income are factors that are keeping the market buoyant. “The property market is in better shape – inventory levels across the board have fallen to normal levels.”
When it comes to investment themes, it is clear where Mio’s focus lies. “Next year, consumption will continue to be a central theme; this will come in the form of a Consumption Upgrade, as disposable income and the propensity to spend increase.” Mio goes on to explain “Technology and Innovation is one area where there is potential to generate new consumer products, while Healthcare Reforms in tandem with an aging population will attract interest as people spend to improve their quality of life.”
Other themes are the New Silk Road Initiative focusing on cross-border infrastructure and construction and Made in China 2025 – a plan for China to develop its high-end manufacturing in strategic sectors over the next ten years.
Mio concludes: “I see a positive year ahead with the emphasis on growth consolidation and further steps in the transition to China’s new economy. Stable growth will be maintained ahead of the leadership changes. External factors – unexpected actions from the new Trump administration, for instance – could cause market volatility, but the domestic situation looks stable.“