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Markets unmoved by China growing pains

Ed Monk

Ed Monk - Fidelity Personal Investing

A quick glance at the headlines surrounding a slowdown in Chinese gross domestic product (GDP) might lead you to think a disaster has befallen the world’s second largest economy.

Markets unmoved by China growing pains

‘China’s economy growing at slowest rate in nearly 30 years’, is how the Financial Times captures it. It’s true enough, but context is everything. China GDP grew at an annualised 6.2% in the second three months of 2019. This is indeed a slowdown, from a rate of 6.4% in the first quarter and 6.6% in the same period last year. It is also the slowest growth for 27 years.

Yet growth at 6.2% was in line with most expectations and, in case you hadn’t noticed, is still high for such a large economy. The fact that China is now growing at a slower rate it has historically is similarly no surprise. As China develops, the pace of its growth was always likely to slow down to levels more common in other large economies, like the US.

As such, the 6.2% figure was largely priced into markets ahead of the announcement and bourses have been largely unmoved this morning.

Does that mean all is well? Not entirely. Exports from China are falling and imports have shrunk as demand eases. Chinese factories have been lowering headcount as activity reduces. The Chinese authorities have been trying to stimulate the economy by tinkering with bank rules, requiring them to hold less in reserve as a way to boost lending, and cutting taxes. They have so far resisted more comprehensive stimulus packages that include interest rate cuts and quantitative easing.

The rest of the year will be watched very closely for signs of what comes next for China. Growth at these levels won’t alarm too many but a faster slowdown will begin to solidify fears that China has bigger problems. The ongoing trade war with Donald Trump is an obvious point of concern, and the GDP numbers this week offer a mixed verdict on the impact it is having on Chinese growth. Exports are lower but daily output for crude steel and aluminium both rose to record levels.

For investors it is another reminder why China, despite its vast size as an economy, remains at the margins rather than the core of a balanced portfolio. Growth overall is strong and many companies which serve the fast-expanding Chinese middle class have huge potential. Yet that growth looks much weaker when you look at growth on a per capita basis (as a function of the country’s very big population) and stands to be disrupted if free trade is disrupted further.

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