Investment Clock insights

Is strong Chinese growth good news or bad news?


Hiroki Hashimoto

18 July 2017

The upswing in the Chinese economy since 2015 has provided much of the impetus for the strong performance of stock markets around the world so we should pay close attention to where China is heading next. The picture is mixed.
Real activity has surged over the last two years and China has been operating a kind of stealth tightening program, allowing inter-bank rates to rise without raising official interest rates (chart 1). Business confidence has dropped somewhat but yesterday’s official Q2 real GDP numbers printed a better than expected 6.9% year on year. The chances of a negative growth shock over the summer have receded and we don’t expect the authorities to slam on the brakes right now with the five-yearly Party Congress due in the Autumn and with Chinese Producer Price Index (PPI) inflation coming off its highs (chart 2).
Solid growth in China could extend the current low volatility environment to the benefit of carry strategies like global high yield and the Australian dollar, where we are overweight in our multi asset funds. We still see equities as vulnerable to negative surprises, however, and we are only modestly overweight. Chinese growth could turn out to be too strong for comfort if rising commodity prices lead to a faster than expected tightening in developed economy monetary policy. 

The upswing in the Chinese economy since 2015 has provided much of the impetus for the strong performance of stock markets around the world so we should pay close attention to where China is heading next. The picture is mixed.

Real activity has surged over the last two years and China has been operating a kind of stealth tightening program, allowing inter-bank rates to rise without raising official interest rates (chart 1). Business confidence has dropped somewhat but yesterday’s official Q2 real GDP numbers printed a better than expected 6.9% year on year. The chances of a negative growth shock over the summer have receded and we don’t expect the authorities to slam on the brakes right now with the five-yearly Party Congress due in the Autumn and with Chinese Producer Price Index (PPI) inflation coming off its highs (chart 2).

Solid growth in China could extend the current low volatility environment to the benefit of carry strategies like global high yield and the Australian dollar, where we are overweight in our multi asset funds. We still see equities as vulnerable to negative surprises, however, and we are only modestly overweight. Chinese growth could turn out to be too strong for comfort if rising commodity prices lead to a faster than expected tightening in developed economy monetary policy. 

Chart 1: China has been tightening

Chart 2: China PPI could be peaking


The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.