Hermes’ head of investment office Eoin Murray has said comments by senior Chinese officials suggest the country’s economic slowdown is unlikely to be followed by a swift rebound.
Chinese economic growth slowed to 6.7 per cent in the first quarter of 2016, the lowest level for seven years.
The country’s policymakers have loosened monetary policy and introduced greater fiscal stimulus in response, moves which have led some to consider the possibility of a “reflation” of the Chinese economy, as Investment Adviser reported last week.
However, Mr Murray said he was retaining a more negative stance, in part because of reports that officials in China are expecting an “L-shaped” recovery – wherein economic performance does not recover from the slowdown.
Mr Murray said: “The comments were made by an authoritative person in the People’s Daily – the Communist Party’s most important paper – and are assumed to come from someone at the centre of government.
“I think the Chinese would like us to believe their economy is at the point of turn, although my own view is that there is speculative excess, in commodities for example, that will need to be removed from the system, and credit expansion that needs to be dealt with.”
An L-shaped recovery, as opposed to a “U-shape” growth process whereby recovery is relatively swift, suggests that the recent slowdown in China’s growth is here to stay.
China is attempting to shift its economy away from a current reliance on manufacturing to one driven by consumers, particularly China’s emerging middle class, although it is not clear whether policymakers’ stimulus measures will help or hinder this process.
The article referred to by Mr Murray warns of the potential consequences of a highly leveraged economy driven by credit, including threats to the country’s financial system.
Mr Murray, a former Old Mutual chief investment officer who joined Hermes last year, added: “Perhaps some words from the article itself will help guide us to what [policymakers] are thinking: ‘A tree cannot grow up to the sky – high leverage will definitely lead to high risks… Any mishandling will lead to systemic financial risk, negative economic growth, or even have households’ savings evaporate. That’s deadly.’
“These words appear to be an effort to address the record jump in credit that has helped stabilise the economy in recent months. The authorities are anticipating that weak demand and overcapacity will persist for some years to come.”
The implication, according to the investment office head, is that investors and economists should not rely on China to boost global growth rates any further.
“China, alongside the US and Europe, has been one of the global economy’s key engines and, with the others undergoing a mixed ride, the suggestion is that we should not look to China to continue to take the lead.”
