Charles Stanley's Global Strategist, John Redwood, comments on China's growth figures

19/01/2016

Charles Stanley

"The Chinese figures for economic growth should not have come as any surprise to markets. The government had long heralded a slowdown in growth, and the final figures for last year were similar to their indications over recent months. The Chinese economy, according to the official figures, is still one of the fastest growing economies in the world. As planned, its growth is now coming more from consumer demand and services and less from industry and exports. Some commentators think the official figures flatter, but so far China has avoided the hand landing of tipping into recession that has worried the pessimists.

“The Chinese markets have been damaged by the loss of control in the second half of last year. Attempts to correct excessive speculation in shares led to a sharp sell off which threatened to overshoot. The share market still has an overhang of holders who have been required to remain to sustain the market. The government changed its handling of the yuan. This was  partly at the request of the IMF and World Bank in order to make the yuan one of the world’s leading five currencies with its own place in the Special Drawing Rights group of currencies. Instead of shadowing the dollar, the yuan is now linked to a basket of currencies. Markets have found this difficult to adjust to, and have fretted over possible Chinese devaluation. Asian and other markets have been concerned about competitive devaluations with more deflationary pressure from lower prices.

“There will now be a discount placed on Chinese shares owing to problems handling the transition to a more open market. There will also continue to be periods of general worry about the strength of Chinese demand and the impact of a lower currency on other trading nations. However, the Chinese authorities still retain substantial financial fire power through their large reserves of foreign currencies. They have scope to take more reflationary action, with possible cuts in interest rates, further reductions in bank reserve requirements and other means to boost credit. The most likely outcome is of continuing slower growth, further measures to stimulate the economy, and some restraint in managing the float of the yuan currency. This is a background for volatility but for longer term upward progress, with Chinese shares quoted  in Hong Kong being both cheaper and bit more liquid than on the mainland..”

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