Managing a slowdown in China

James Soutter

K2 Asset Management

Chinese Premier, Li Keqiang has delivered the opening remarks to the Peoples National Conference in Beijing focusing on Chinese growth, burgeoning debt and changes to taxation.

China is carefully managing a gradual slowdown in its economy, avoiding hard landing scenarios and addressing debt bubbles. Fiscal stimulus and tax reform are the new agenda items, moving away from monetary stimulus and debt injections. This also plays towards commentary from President Xi Jinping, who was recently on record declaring that financial security is an important part of national security. If China were to experience a hard landing, the reverberation that would flow through the Chinese political system would likely see the downfall not only of Xi Jinping but also possibly the Chinese Communist Party. Financial stability is a key tenet and one that the Chinese Government will not back away from.

China’s target for GDP growth has been slowly reducing over recent years and this year is no exception. GDP growth is expected to be “between 6.0% and 6.5% in 2019” from a target of “about 6.5%” in 2018. The lower GDP forecast won’t be a negative surprise to markets as the slowdown in the Chinese economy is well understood. That said, if GDP growth were to come in at 6%, it would be the slowest pace of economic growth since 1990, when Chinese GDP hit 3.8%.


The tax reform agenda will see a cut of 3 percentage points to the top bracket of VAT, a benefit to domestic manufacturing, with a possible positive impact to the Chinese economy of 0.6% of GDP. This is in-line with the stated objective of fiscal policy being “proactive, stronger and more efficient”, allowing the Chinese Government to target individual industries and specific regions.

The third leg of the policy announcement was to manage China’s debt ratio by keeping this stable at current levels for 2019. With total debt to GDP sitting at 266% and a 2019 budget deficit targeted to be 2.8%, this policy should contain the amount of leverage in the financial system, allowing markets to focus on positive long term economic stability.

Recently, the largest overhang on the Chinese economy has been the trade war with the US. The latest rhetoric suggests that a deal is close, including the possibility of removing existing US tariffs on Chinese imports. With a resolution to the trade war, the Chinese Government will be free to implement further fiscal stimulus. Areas that will be high on the agenda include the domestic auto sector, manufacturing and infrastructure projects.

Internationally exposed K2 funds maintain an exposure to China and those sectors that should benefit from a resolution to the trade war and subsequent fiscal stimulus.


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James Soutter
James Soutter
Joint Chief Investment Officer
K2 Asset Management

James is the joint-CIO for the K2 investment funds. In conjunction with his responsibilities as joint-CIO, James dedicates his time managing an allocation of the Asian and international equity strategies.

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