What cooling growth in China means for investors

China’s growth is set to cool in 2018 after a surprisingly strong year. Richard explains the investing implications.

China’s growth is set to edge lower in 2018 after a surprisingly strong year, and economic risks are rising. Yet we believe the key party congress this week will likely serve as a prelude for deeper reforms. We see China’s growth rate slowing only to still-solid and more sustainable levels. The implications for investors? Growth in China should remain supportive of emerging market (EM) assets and risk assets in general.

China’s growth acceleration (reflected in strong domestic demand in the import data below) helped foster this year’s EM recovery, boosting EM earnings growth and equity outperformance.

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China’s recovery also coincided with a near perfect set-up for EM assets: a weaker U.S. dollar, falling bond yields, rising commodity prices and a more synchronized global expansion. Our BlackRock Growth GPS for China still points to steady growth in 2017. Sustained, above-trend global growth also helps underpin China’s key exports. China’s growth may come off slightly in 2018, but we expect growth at levels that should still be positive for EMs and risk assets globally.

Prioritizing reform

The road ahead for China and EMs may be bumpier than this year. Chinese President Xi Jinping is widely expected to shake up the ruling Politburo and bring in more allies at the twice-a-decade Communist Party congress that sees a reshuffling of most officials. This will give Xi greater sway to chart the country’s course over the five years of his second term. He is likely to speed up work on his key initiatives: further cleaning up bloated state-owned enterprises and delicately cutting down on the country’s reliance on debt to boost growth.

Supply-side reforms played a role in this year’s surprise Chinese economic rebound that boosted commodity prices and industrial profits, lifting growth back near a 7% annual pace. Some of that one-time boost has faded. Yet supply-side reforms, coupled with tighter environmental regulations, are spreading to a wider range of industries plagued by overcapacity.

The risk to our thesis is a sharper slowdown once the desire to prop up growth and ensure a smooth party congress begins to fade. Bank lending and credit are cooling—the result of a healthy move to crack down on shadow banking and leverage. Trade relations with the U.S. may come under strain, in part due to the tensions with North Korea, and hurt exports. Regulatory moves to take some steam out of the frothy housing market may cause a downturn in construction activity. A rebound in the U.S. dollar could spur renewed capital outflows and put the People’s Bank of China in a tricky spot managing the currency and economy. This all comes as China attempts to shift its growth mix to one that is more consumer-led and less reliant on infrastructure investment.

Our bottom line: We believe China’s growth rate will slip to still-solid and more sustainable levels. That should remain a positive for EM assets and risk assets, even if the sailing is unlikely to be as smooth ahead. Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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