Comment: China settles for stable growth while embracing new global role

Digital Look WebFG News | 06 Mar, 2017 14:35 - Updated: 12:39 | | |

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By Ipek Ozkardeskaya, senior analyst at London Capital Group.

China has surprisingly kept its growth target little changed from last year. Early on Monday, Chinese officials announced they would target 6.5% year-on-year growth in 2017, or higher if it is possible, from the 6.5-to-7% range last year.

Despite the recent rise in inflationary pressures, mainly due to the sharp appreciation in the US dollar and the recovery in oil and commodity prices, Chinese officials kept the inflation target unchanged at 3%.

In compensation, the M2 money supply target has been revised down to 12%. It now looks like the People’s Bank of China is seeking to tighten monetary conditions, minimizing risks of bad loans and avoiding speculative bubbles.

China is in fact taking encouraging steps regarding the future. The world’s biggest emerging market has an immense domestic potential to be exploited.

It appears the emerging markets giant is turning toward stable and balanced growth, leaving behind the unstable model of fast, chaotic expansion which certainly was the main cause of tumbling stock prices in Shanghai by the end of 2015.

Although the Chinese slowdown story has worried global investors over the past year, not all investors stepped out. In fact, many rapidly agreed that double-digit growth is not sustainable in the long-term.

They were probably right. As an economy grows, the rate of growth gradually decreases. This is referred to as the convergence theory.

The specialization comes along with the economic development. This is why the Chinese slowdown story has generated many opportunities, perhaps not the same as before.

But, many missed the real story.

Investors who have understood that China has already taken a new role in the global growth have never jumped off the train.

In fact, China is gradually moving away from the business of manufacturing cheap items, as the average salaries in China are no longer competitive compared to other Asian economies, such as Vietnam, Cambodia, or Laos.

Today, China de-localizes to cheaper destinations itself to concentrate their efforts on what they now do the best.

In the continuation of its economic development, China has already put in place the building blocks of what is to become the future of retail technology.

As a result, several sectors, led by technology and logistics are booming in China. China’s giant companies as JD, Ali Baba and Tencent are far beyond their Western competitors both in terms of procedures, the use of actual technology and the speed of innovation toward future technologies.

Despite the strict financial controls with the rest of the world, the cash turnaround within the country is remarkably high.

New technologies such as Ali Pay or WeChat Pay, which indeed are no longer new in China, have given an astonishing push to the retail activity, allowing the country to exploit its domestic potential and reduce its dependency on the rest of the world.

This is a major step in the current de-globalization trend.

What China is aiming today is a quality growth. Financial reforms have started.

Today, for example, China now allows foreign investors to repatriate their full profits, hedge their foreign currency risk and even invest in Chinese sovereign bonds.

Although the country has still a long way to go, it gives signals that the big ship is moving in the right direction.

Of course, financial and regulatory risks are still a major concern for many business owners; nevertheless Chinese Premier Li Keqiang announced the yuan’s exchange rate will be further liberalized.

As the global trends are shaken up with Donald Trump’s conservative policies, the Brexit and rising anti-European risks, it may be China’s time to rise and shine.

Sector selection will be the key of success in investing in China for the next 10 years. We are long technology and logistics, short sectors that require little formation and cheap workforce.

Ipek Ozkardeskaya is a senior market analyst at London Capital Group.

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