China entering a new frontier

Chinese growth expectations have been revised down since the summer.

Downgrades have been happening since June and July 2013, says Raymond Chan, managing director and CIO of Hamon Investment Group. His company manages the Renaissance Asian Fund.

This bottoming out of growth is occurring, he adds, because the government is trying to support the economy primarily by providing liquidity to banks and ramping up fiscal policy.

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On the upside, says Chan, “[We’ve seen] a lot of high-frequency economic data points—such as industrial production data and PMI—improving in the last two to three months. Market participants have more confidence that the 7.5% growth targets of the government will be achieved, and markets have improved since the middle of July.”

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On the emerging market front, Chan has seen some selective markets up because of the outflow on domestic bonds. Rising interest rates and currency volatility have also contributed to surges.

In fact, “China has done quite well against the global emerging market backdrop since the middle of July. The market has more confidence that the growth target set by the government would be achieved in 2013.”

For the next six to twelve months, China is heading towards a more stable growth outlook, Chan continues, adding, “The very high growth numbers of the past are history. So the government is targeting between 7% and 7.5% over the next two years.”

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For this goal to be achieved, China needs to change, he concedes. As a result, there were some key reforms developed by the new government in March 2013. This includes the development of the China (Shanghai) Pilot Free Trade Zone. It’s key to change the way China operates and broaden the economy into the service sector.”

Due to this new development, China could achieve a higher growth rate than the rest of the world in the next few years, says Chan.

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On the export side, he adds, China must “move to some other industries, rather than only on the…traditional industries like textiles. Labour costs, and the currency have made China not necessarily competitive against countries like Cambodia and Sri Lanka.”

That’s why one “of the key industries China is targeting on the tax side, and rapidly gaining market share in, is the low-cost smartphone [industry], [both] on the component side or manufacturing side.”

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Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.