Multi-Asset

China

The world’s locomotive is slowing. Recently the Bankfor International Settlements reported: The Chinese economy gradually decelerated throughout the year...
January 2019

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Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The world’s locomotive is slowing. Recently the Bank for International Settlements reported: “The Chinese economy gradually decelerated throughout the year as authorities pressed ahead with a deleveraging policy aimed at keeping financial stability concerns at bay. The pronounced downturn in stock prices, which deepened in October, tightened financial conditions further through its impact on equity-backed loans.”

At the same time the currency has been depreciating both against the US dollar and many of its emerging market competitors, putting pressure on official interest rates in countries such as Indonesia, India, Pakistan, the Philippines, Turkey and Argentina.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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The National Bureau of Statistics in China reported at the end of December that industrial profits fell 1.8% in November from a year earlier. This was the first decline since December 2015. The decline largely reflected slowing growth in sales and producer prices as well as rising costs.

China helped pull the world out of the global financial crisis with extraordinary levels of capital investment. We know now that much of that investment was wasted. No doubt you will have read about (if not seen) the “ghost” cities in China. Leverage has rocketed and the pay-back is meagre. IMF calculations suggest that China’s nonfinancial private sector debt has risen from 114% of GDP in 2008 to a meaty 210% in 2017 (see below). The same source indicates that general government gross debt has risen from 27% of GDP in 2008 to 51% in 2018.

We doubt that China can play such a prominent role the next time around as it has fired many of its bullets. The problem is we can see no ready replacement.