So let’s talk about the elephant in the
room...China... what is going on there or rather what can happen?
Global growth indicators from US to Europe to China are all showing signs of a synchronised global recovery. Hoorah for the markets! With talks of a “very very very good” tax reform bill promised by President Trump, alongside President Xi Jinping outlining his vision for China through 2050, the market is convinced we are now in a goldilocks scenario where growth is stable and inflation subdued. Happy days!
Now for some conspiracy theory....(for those amongst us who are slightly more doubtful)...
Going into the twice a decade National Congress of the China Communist Party gathering last week, an event that cemented President Xi Jinping future for good as head of the party over a period even beyond his normal term, there was no way China would, or could, allow any instability going into this event. In fact, memos circulating amongst banks and traders read asking them to provide stability and liquidity into the important week. Companies reporting bad numbers were told to delay their report until after the week was over. (Call me a cynic but is not one of China’s ambitions to provide full and open
Chart 3: China Manufacturing and Services PMI
disclosure?) Given the gentle rise higher across the local indices and global asset classes on low volume, it seemed rather dubious. One can argue, now that the “big event” is over, markets are free to move on “real” news.
There is no doubt China’s plan for the One Belt One Road (OBOR) initiative, alongside other reforms to cut pollution, and promote anti-corruption policies is going to facilitate stable and solid growth going forward. My only point of contention is the rate of growth and its timing. It is centred very carefully around the key 6.5% growth p.a. (as seen over the last several quarters with such remarkable stability). This year has seen an increase in stimulus and credit driven growth especially since the devaluation fears of January 2016. China could very well be growing a lot faster than people think or less but they engineer their growth to mean revert around 6.5%. One can also argue, post the stellar growth seen this year, it may be time to take their foot off the pedal now?
Chart 4: China Macro Surprise Index
34 | ADMISI - The Ghost In The Machine | November/December 2017
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