“China will be more resilient than other emerging markets,” Taylor said at a media briefing in Hong Kong, outlining the firm’s view for the next four quarters. The firm has widened its China exposure, adding more older economy and consumer stocks.
In 2018, China aims for a GDP growth around 6.5%, with a lower deficit target. “Chinese growth will be lower, but of higher quality,” Taylor said.
While Chinese president Xi Jinping’s apparent intention to remain in the office beyond the customary two five-year terms raises concerns about the country’s move towards authoritarian rule, it promises political stability and continuation of current economic policies. “Longer stability in China will be very positive for Chinese market,” Taylor said.
The country is not vulnerable to rising interest rates in the US, according to Taylor, as it has already “pre-tightened” its monetary policy. With China’s regulators pursuing policies aiming to curb the shadow banking sector and to deleverage the economy, “the international view on China has been improving”, Taylor said.
Despite the progress in tackling the high amount of debt, investing in Chinese bonds is still fraught with risk as there’s little differentiation in the bond market. “The companies we think have the worst credit rating are trading at investment grade yields,” Taylor said. “We’re still pretty selective in Chinese bonds.”
While the renminbi is likely to weaken, according to Taylor, “it is not necessarily a bad news for the economy”, as the country’s domestic economy is strong.
While the US may implement protectionist policies, China’s exposure to US sales is relatively low, compared to other countries in the region, such as Taiwan, Japan or South Korea. And although Taylor said he hoped that a trade war can be averted, it remains one of the top global risks.
The main risks specific to China include the potential dampening of the economy due to excessive tightening of liquidity in an effort to deleverage the economy and curb the non-bank financial sector.
Another risk is a flight of capital that would trigger a crisis of confidence and a fall in the renminbi. If it happens, it might result in inflationary pressure, higher interest rates and lower economic growth.
Additional risks include local bond market defaults as a result of gradual withdrawal of government guarantees, as well as a potential fall in house prices, although both are considered of low probability and with limited market implications.