China: Recovery ahead
We expect the Chinese economy to rebound in the second half of the year following a series of measures taken by the Chinese government, including a phase one deal and deleveraging of non-financial corporates. Significant shocks are still fading through the economy till then. An eventual rebound in activity should benefit Asia Pacific, Latin America, Germany and, for that matter, US growth stocks. Rising foreign reserves should pressure EUR/USD higher by year end.
A structural slowdown
The Chinese economy is going through a structural slowdown as a result of its progress toward becoming an advanced economy. Other contributors are its ageing population, competition with advanced economies in the tech sector, scarce commodity reserves, accumulation of an easy inventory of infrastructure and real estate and an environment that favors national winners.
1. As an economy moves from agriculture to manufacturing and then services, the value-added chain, namely the physical, financial and intellectual capital, increases and with it the number of humans involved. This process becomes ever less efficient causing the economy to slow. Currently, China is following a trajectory reminiscent of Japan and South Korea, rising sharply as a percentage of world trade before slowing down. This trajectory has lasted longer, fed by aggressive currency interventions which have superheated China’s economy for a long time.