Talking PointMay 4 2018

Woodford predicts slower growth for China

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Schroders
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Supported by
Schroders
Woodford predicts slower growth for China

The veteran fund manager and founder of Woodford Investment Management warned the 'growth at all costs' mantra of the past decade would be a thing of the past.

He commented: "There is growing evidence to suggest that, with Xi Xinping having consolidated his power base at the Communist Party Congress last year, the priorities of the Chinese authorities going forward will be profoundly different to the ‘growth at all costs’ mantra of the last decade."

Consensus estimates predict the Chinese economy will slow to 6.6 per cent growth in 2018 from 6.9 per cent in 2017.

Some also expect the People’s Bank of China (PBoC) to cut the reserve requirement ratio (RRR) by another 100 basis points in H2 2018.

Mr Woodford said there had been many "tangible signals" to suggest the Chinese authorities are no longer prepared to ignore the economic risks that have accompanied several years of unbridled credit expansion.

Further market impact should arrive through commodity prices, which will not greet the absence of demand growth from China favourably. Neil Woodford

These include the ‘Minsky moment’ comments - a phrase that denotes a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressure - made by China’s central bank governor, through to the cancellation of several massive infrastructure projects, Mr Woodford said.

He added: "The economic implications of this are not positive for China in the near-term, nor for the rest of the world.

"Already, we’ve seen indications of a slowdown in China’s economic data, with disappointing trade data in late January and the lowest level of money supply growth since records began in 1996.

"We believe we’ll see progressively slower growth from China as the year unfolds, as the country faces up to its massive bad debt problem and exports deflation to the rest of the world via its currency."

Mr Woodford made these comments on his website, where he also showed a breakdown in geographic exposure within his flagship LF Woodford Equity Income Fund, which is more than 90 per cent invested in the UK, as per its mandate. 

However because there is indirect exposure in many FTSE 100 companies to Chinese growth, because of the nature of their global operations, the fund manager has "actively avoided exposure to parts of the market that are vulnerable to the slowdown that we expect to see in the Chinese economy".

He commented: "The most obvious route back into financial markets here is via a lower contribution to global growth from China and indeed Asia more broadly. This is not priced in.

"A further market impact should arrive through commodity prices, which will not greet the absence of demand growth from China favourably.

"If the Chinese authorities crack down further on regulation to curb financial speculation on commodities, among other things, then the impact on commodity prices could be significant."

Per Hammarlund, chief emerging market strategist at Nordic bank SEB, agrees the economic signals suggest a slowdown in China. 

He gave another reason why China might be set for a fall, given it "has been facing threats recently from uncertainties surrounding trade tensions with the US, which fuels more downside risk".

However, he added: "Although President Xi emphasizes the importance of the quality of growth rather than the pace of growth this year, Beijing will not allow a sharp fall in GDP growth to disappoint the market and discourage foreign investors."

Charlie Huggins, investment manager for Bristol-based Hargreaves Lansdown, said signs could be more favourable in the long-term.

He commented: "Investment is being poured into China’s Pearl River delta region and early signs are encouraging.

"The vast expansion of Chinese infrastructure and industrial capacity seen in recent decades bodes well for the region’s future growth."

simoney.kyriakou@ft.com