The sell-off in Chinese corporate bonds and the clampdown on domestic credit growth need to be seen in context: the rise in corporate bond yields will accelerate the shift from old to new industries. The Chinese Government can afford to take a hard line. The rapid growth of new services will absorb displaced workers. Cyclically, the economy turned a corner during the second half of this year. China will roil global markets periodically through 2017. However, as in 2016, investors will do well to focus on the underlying shifts in China’s economy.
Creating a strong, dynamic technology sector has been pivotal to China’s economic transition. The authorities have been able to address over-capacity in a range of industries including iron & steel, chemicals, shipbuilding and coal, maintaining full employment while avoiding a hard landing.
Many of these new successful companies are contributing to the capital outflows that have reduced China’s forex reserves. Nevertheless, the renminbi has risen 1.7% on a trade-weighted basis since November 8th. The potential stimulus for recipient countries should not be underestimated either: the resulting technology transfer will boost economic growth across EM countries, notably in South Asia, but also in Latin America and Africa.
Summary
- Defaults in old sectors will facilitate shift to new areas of growth
- Chinese Government playing the long game
- China to pull ahead in key technologies
