The following is a snip-it from Premium China’s February 2016 Investment Insight

Amidst the market volatilities seen in the month of January and the increasing fear of a China hard landing, we would like to share with you our investment team’s view on the recent market developments and thoughts on topics such as currency and economic growth.

Moderating growth but not a hard landing

The current panic selling shows fears over a hard landing in China, as well as doubts that the country has to depreciate the renminbi to boost growth. We think the extreme pessimism is overdone. It is true that China’s economy has weakened substantially and we continue to see fatigues in the “old economy” sectors, but there are also increasing signs that activities may have started to stabilise.

Besides, new economic indicators such as movie box office, the number of airline passengers, auto sales and 4G mobile subscriptions all pointed to an expanding “new economy” in China last year, and the contribution of real tertiary output to China’s economic growth has increased to close to 60% in the first nine months of 2015. As the government pushes ahead with the necessary reforms, the “old economy” sectors will continue to drag on China’s growth, and this is perhaps the price to pay for a more sustainable economy in the long term. The structural rebalancing will be a multiyear process and more bumps are expected along the way. We will continue to be very careful with our stock picking in this transitional period.

CNY weakened against USD but the trade-weighted index largely stable

We believe the recent adjustment of the renminbi is more about the dollar strength than the renminbi weakness. China needs relative currency stability to avoid financial panic and maintain confidence in its policy, and it is not in its interest to substantially devalue the trade-weighted exchange rate, although the renminbi may become increasingly decoupled against the USD. Allowing the renminbi to fall against the dollar helps pave the way for further monetary easing by the central bank, and this has nothing to do with a big competitive devaluation to boost exports as China’s export growth has actually been holding up better than some Asian countries which have devalued their currencies.

Policy easing expected to step up

We believe stimulus spending will continue to support the Chinese economy – monetary policy is expected to stay accommodative in 2016 and the central government is anticipated to step up fiscal effort to stabilise the economy. While the room for further rate cuts decreases, most monetary easing in 2016 may come from cuts in the reserve requirement ratio. It will be a policy priority to maintain the momentum of government spending, and the unofficial fiscal deficit can also increase given restrictions on bond issues by local government financing vehicles have been lifted and official local government bond issues are rising.

Article written by Simon Wu and Jonathan Wu from Premium China. Full article available here

CategoryEconomic Update

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