Strategists not overly pessimistic on China

The rebalancing and slowdown in the Chinese economy will be a long and drawn-out affair, economists at RBS said on Monday, following the release of a much weaker than expected reading on the country’s factory sector.

That report showed China’s manufacturing sector was continuing to struggle under the burden of overcapacity, high leverage and a strengthening currency, RBS’s macro credit strategy team led by Alberto Gallo said.

Beijing had sufficient ‘dry-powder’, in terms of room to apply more stimulus measures, to assist the economy as it rebalanced towards internal consumption and away from exports and investment, RBS told clients.

However, with the economic transition likely to take years Chinese leaders were likely to introduce new support measures only sparingly.

Policy-makers could count on $3.4trn in reserves to assist them, but the central bank was losing between $50-100bn a month, Gallo emphasised.

Over the last eight years the stock of fixed asset investment had doubled and the amount of private debt alongside it. “Using all tools for a major stimulus would also exacerbate the existing structural problems of overcapacity and debt overhangs, and delay the economic adjustment,” he said.

Hence, the strategist from RBS expected China’s slowdown to weigh on both developed and emerging market credit in 2016.

On a more positive note, as far as the equity space was concerned, UBS strategist Niall MacLeod wrote to clients telling them to ‘overweight’ Chinese, Indian and Japanese shares, given the reforms that were underway in the three countries.

Similarly, Mislav Matejka at JP Morgan said he saw signs that the Chinese consumer was stabilising to some degree.

“Retail sales, house prices, car sales, property transactions and M2 have all improved. New infrastructure orders are also showing signs of life. All these are important to keep in check the overwhelmingly bearish sentiment on the region.”