Modernisation plans make China’s equity markets a good bet

Amid a flurry of doom-laden reports about China's economic outlook, a very bullish report comes our way from Barclays, entitled China 2.0: a new economic dawn", which argues that while the growth story in the world's second biggest economy may be slowing, its equity markets still look a good bet as Beijing's plans for economic modernisation take hold.

"Cheap valuations provide an attractive strategic entry point for investors who are able to withstand the near-term volatility prompted by the overhaul," writes analyst analyst Viraj Patel. "Investing in sectors that are likely to profit from reform initiatives may be a valid interim strategy."

China’s economic transition is now in a defining stage, after more than three decades of double-digit growth. The economic slowdown in China is structural, Patel believes, reflecting the economy’s natural convergence towards high-income status. However, rising vulnerabilities in financial and real estate markets pose a genuine risk of destabilising future growth.

“Policymakers must take complex steps to address these imbalances, intentionally accepting slower but safer growth in the near-term, while accelerating a new wave of reforms, as outlined in the Third-Plenum blueprint, to reinvigorate the Chinese economy,” Patel writes.

Patel believes that in the absence of any external shock to the economy, concerns over a “hard-landing” seem overstated in light of China’s policy buffers.

“While credit booms of this size have previously led to sharp corrections, a key distinction is the government’s capacity – and most importantly, willingness – to prevent a loss of confidence or a sudden stop that could intensify the aforementioned vulnerabilities of the economy,” Patel argues.

Public debt is low, exposure to foreign debt is moderate and China has large foreign exchange reserves, high domestic savings and controls to limit the exodus of capital, so the chances of an abrupt adjustment are low.

Slower growth is less of an issue than it might be as the Chinese economy is still creating enough jobs, and is finding new sources of productivity growth through reform.