Bolton says he remains “as convinced as ever by the long-term case for investing in China”, and few would disagree with that statement, taken at face value. But whatever the supposed emphasis on long-term investing, few investors would be happy to find themselves on the wrong end of a two-year or even six-month soft patch.
The Fidelity manager says he expects flows to return to emerging markets and begin exiting developed markets again, seeing the current reversal of that trend as a “temporary pause”.
“Some see China as the main driver of Asian growth, on its way to becoming the biggest economy in the world, while others are concerned about excessive credit growth and inflation, property and bad debt problems. Probably the truth lies somewhere between these two extremes,” he said.
Bolton says that while some the concerns about China are valid, many of the conclusions drawn from such issues are not.
Inflation
Inflation remains one of these key concerns.Speaking in April, prior to a number of recent tightening measures, Legal & General IM emerging markets strategist Brian Coulton noted that “while a hard landing is not LGIM’s central forecast for China, the risk of a significant policy-induced slowdown at some point in the next two years is rising.”
Despite numerous tightening measures from Chinese authorities who are looking to get ahead of the curve – a point which many anticipate as a buy signal – China’s National Development and Reform Commission said yesterday that June inflation would exceed the official, 34-month high May rate of 5.5%. Bolton, for his part, believes the true level of Chinese inflation is in “the high single digits”.
Talk of a soft patch when discussing China must be viewed in context of the country’s runaway growth rates, of course. As Ewen Cameron Watt, managing director of BlackRock’s multi-asset portfolio strategies group, points out, even a worst case scenario would still see the Chinese economy grow at a rate of around 5%.
Growth
Nonetheless, Cameron Watt says that “maintaining a growth rate of 9% or 10% is going to be extremely challenging”, and foresees growth gradually easing off to between 6% and 7% on a multi-year view. Bolton himself says something similar: he expects growth to fall back from last year’s 10% to 7-8%.
That, however, will bring problems of its own, given the fact that a growth rate of 8% is considered in many circles to be the minimum acceptable level of growth for China as a result of the millions entering its workforce each year.
Whatever the truth in such theories, and in the attendant possibility of political unrest, market sentiment is unlikely to be favourable if growth does come in below such levels.
The consensus among market participants is that China will achieve a soft landing: as the engine of global growth, a lot is riding on China and its ability to meet those expectations. Authorities may be attempting to walk the fine line between overheating and slowdown, but the room for manoeuvre in terms of market sentiment is very slim indeed.
