China 2016 outlook - Three Rs: Rebalancing, Risk and Reform

Insight
PDF 622.8KB
12 January 2016
The dreadful opening week of the Chinese markets for 2016 has reignited concerns about the world's second largest economy. What's more is that these concerns are no longer contained within China, like they used to be. Thanks to capital account liberalization and global investors expressing "China concerns" via proxies, financial market volatility from China has precipitated contagion across the globe – a phenomenon similar to last August. China (the PBoC) and the US (the Fed) were two major sources of market volatility last year, and this is set to continue in 2016. For investors – invested in China or not – this increased correlation means that understanding China's economy and macro policies is no longer a plus, but a necessity, to navigate the choppy currents of financial markets in 2016.

Key themes for 2016: Three Rs

Economic Rebalancing, Manage Risks, Monitor Reforms

What to recognize: Economy is slowing but rebalancing

  • Headline growth to slow to 6.3%, with continuous polarisation between the new and old economy

  • Slowdown is driven by structural factors (aging population) and medium-term imbalances (from post-crisis stimuli)

  • Economic rebalancing has made progress and will continue; risk of hard-landing is low

What to look out for: Risks and volatility are on the rise

  • Deflation continues to plague industrial sectors – look for actions to divest excess capacity

  • Leverage is high and burdensome – look for increased credit events and debt restructuring

  • Financial system is rebalancing but fragile – look for more market volatility and higher NPLs

  • External account is liberalizing – look for more volatile currency movements and capital flow

What to focus on: Cyclical policies and structural reforms

  • Cyclical policies to manage macro risks:

    • Monetary policy to contain liquidity/financial risks (e.g. RRR cuts to counter capital outflows)
    • Fiscal policy to support the economy and mitigate hard-landing risks (e.g. higher fiscal deficits)
    • Currency policy to prevent excessive FX tightening (e.g. the CNY index to remain stable)
  • Economic reforms to cure structural imbalances: watch for SOE reforms, debt restructuring and destocking

This document is for informational purposes only and does not constitute, on AXA Investment Managers part, an offer to buy or sell, solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these analysis and opinions, these data, projections, forecasts, anticipations, hypothesis and/or opinions are not necessary used or followed by AXA IM’s management teams or its affiliates, who may act based on their own opinions and as independent departments within the Company.By accepting this information, the recipient of this document agrees that it will use the information only to evaluate its potential interest in the strategies described herein and for no other purpose and will not divulge any such information to any other party. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

This document has been edited by : AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Coeur Défense Tour B La Défense 4, 100, Esplanade du Général de Gaulle 92400 Courbevoie, registered with the Nanterre Trade and Companies Register under number 393 051 826.

In Australia, this document is issued by AXA Investment Managers Asia (Singapore) Ltd (ARBN 115203622), which is exempt from the requirement to hold an Australian Financial Services License and is regulated by the Monetary Authority of Singapore under Singaporean laws, which differ from Australian laws. AXA IM offers financial services in Australia only to residents who are “wholesale clients" within the meaning of Corporations Act 2001 (Cth).

In Belgium, this document is intended exclusively for Professional Clients only, as defined by local laws and the MIFID directive, and is distributed by AXA IM Benelux, 36/3 boulevard du Souverain – 1170 Brussels Belgium, which is authorised and regulated by the FINANCIAL SERVICES AND MARKETS AUTHORITY.

In Germany, This document is intended for Professional Clients as defined in Directive 2004/39/EC (MiFID) and implemented into local law and regulation only. In Hong Kong, this document is issued by AXA Investment Managers Asia Limited (SFC License No. AAP809), which is authorized and regulated by Securities and Futures Commission. This document is to be used only by persons defined as “professional investor” under Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO) and other regulations, rules, guidelines or circulars which reference “professional investor” as defined under Part 1 of Schedule 1 to the SFO. This document must not be relied upon by retail investors. Circulation must be restricted accordingly.

In the Netherlands, this document is intended exclusively for Professional Clients only, as defined by local laws and the MIFID directive, and is distributed by AXA IM Benelux- Netherlands Branch, Atrium - Tower A, 14th Floor Strawinskylaan 2701 1077ZZ Amsterdam - the Netherlands, which is authorised and regulated by the FINANCIAL SERVICES AND MARKETS AUTHORITY.

In Singapore, this document is issued by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W). This document is for use only by Institutional Investors as defined in Section 4A of the Securities and Futures Act (Cap. 289) and must not be relied upon by retail clients or investors. Circulation must be restricted accordingly.

In Spain and Portugal, this document is distributed by AXA Investment Managers GS Limited, Spanish Branch, has its registered office in Madrid, Paseo de la Castellana no. 93, 6th floor, is registered in the Madrid Mercantile Register, sheet M-301801, and is registered with the CNMV under 19 number as ESI of the European Economic Space, with Branch.

In Switzerland, this document is intended exclusively for Qualified Investors according to Swiss law. Circulation must be restricted accordingly. This document has been issued by AXA Investment Managers LLC, Qatar Financial Centre, Office 603, 6th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 22415, Doha, Qatar. AXA Investment Managers LLC is authorised by the Qatar Financial Centre Regulatory Authority.

In the United Kingdom, this document is intended for Professional Clients only, as defined by local laws and regulation, and is issued by AXA Investment Managers UK Ltd, which is authorised and regulated by the Financial Conduct Authority.

© AXA Investment Managers 2016. All rights reserved