Chinese GDP numbers were released over the weekend and surprised on the upside – with a print of 6.9% year on year, ahead of market expectations of a slight decline to 6.8%. Local equity markets reacted negatively, initially, as more prudent financial regulation seemed likely based on the weekend PBoC conference, but then recovered based on the firmer data. China operates as the elephant in the room when measuring global financial health – it represents close to 35% of global growth – while trade with China contributes another significant portion. Therefore their government’s financial policies have real relevance to the current market outlook.
An assessment of the PBoC conference is that financial regulation is likely to become more coordinated as the government aims to control financial risks without sacrificing growth. There as also interest in opening up the financial sector and promoting RMB internationalization.
So should we conclude that China and its ultimate direction presents one of the biggest regional risks, or that, as some commentators would suggest the bottom has already been skirted in China – evidenced by the collapse in the growth rate from double digits (as high as 24% in 2014) to the current 6% plus level? I would suggest that it should be viewed as a complex economic engine that is subject to micro-management – not a bubble poised to burst or cause geo-political shock waves.
China’s tendency to in-source production, as well as its own demographic trajectory (its workforce is contracting due to an aging population) can have critical influence on the surrounding region. It is a “beast” that must be well understood, but arguably not feared.