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China tasked with defying the doom

Ed Monk

Ed Monk - Fidelity Personal Investing

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From a vantage point here in the UK - where the economy grew by an estimated 1.5% last year - reading about China growth can be a disorientating experience.

The ‘slowdown’ in China being reported today refers to growth of 6.6% in 2018, which has left some fretting that the country is on the edge of a serious crash. If that’s fair - where does it leave us?

The difference in expectations is explained by the fact that rapid growth in China is now taken for granted. At 6.6%, the figure for 2018 was the lowest China has managed since 1990, a year after tanks rolled through Tiananmen Square to quell pro-democracy protests. The number is forecast to drop lower still in 2019.

The heightened concern about China is not unjustified. The country has become the world’s industrial engine room, just as the United States of America was in the early and mid-20th century. As western economies have aged, China’s has taken up the slack by providing millions of new, urbanised consumers who need first roads, cars and concrete cities and later the convenient services and luxury trappings of middle class life. Any sign that this demand is weakening is bound to send a chill through the global economy.

Another ominous portend was the news this month that vehicle sales in China - including cars, vans and buses - fell for the first time in 28 years. When the economic data coming out of the Chinese government has been doubted, it is numbers like car sales which many rely on for indications of the economy’s health.

Ironically, it is attempts by the Chinese authorities to safeguard the economy that are dragging on growth now. For years the government has been trying to limit the amount of credit that individuals and businesses build up, and this has slowed economic activity. These preventative measures are themselves responses to stimulus measures that were embarked upon in 2009 to protect China from the global credit crunch, but which fuelled a huge bubble of debt.

Fears over the Chinese economy are nothing new, however. A question you’ll often hear is whether the country will suffer a hard or soft ‘landing’ as it moves from being a rapidly growing, but volatile, developing economy towards being a slower growing, but more stable, developed economy. It is instructive that this question has been asked for 15 years at least.

For most ordinary investors the extreme, but divergent, possible paths for the Chinese economy means exposure to the country should be at the margins, adding high-growth potential around a larger component of developed market shares.

The negative headlines may well become a theme in 2019 - particularly as China is embroiled in a trade war with Donald Trump - but the country’s recent history is of defying the worst predictions for its prospects.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets.

This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.