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Articles

China's economy is facing challenges. Yet these can be overcome.

Despite the trade war, the 2019 investment year should be positive for the economy in China. Find out how China is overcoming these challenges and why there are still investment opportunities there.

Economy in China determines world trade

The term "Silk Road," which refers to the historic trade route between China and the eastern Mediterranean, is now receiving a new dimension: Through the "Belt and Road Initiative" program, the Chinese government initiated huge infrastructure projects, such as roads and bridges, as well as the expansion of railways, shipping, and aviation. The projects, started nearly six years ago, form the basis of 21st-century strategic goods transport.

Experience shows: Investment in modern infrastructure facilitates macroeconomic development like virtually no other type of investment. Economists are therefore expecting the BRI to boost not just Chinese gross domestic product but also the GDP of the other involved countries by an additional 4 percent over the next five years. This equals to roughly 240 billion US Dollar.

The-Belt-and-Road-Initiative-connects-China's-economy-with-the-world

The Belt and Road Initiative connects China's economy with the world.

Source: Geopolitical Intelligence Services, Debate: What China’s new Silk Road means for Europe, 27.11.2017 (lien)

Shenzhen is a symbol of China's economic growth

The megalopolis Shenzhen is very much emblematic of China’s potential when it comes to growth: Back in the 1970s, Shenzhen was just a sleepy fishing town. Fast forward 50 years, and Shenzhen has grown into a major metropolis with more than 12 million inhabitants and the world’s third-largest freight port. The introduction of the special economic zone in the 1980s attracted many foreign investors. This has turned Shenzhen into the hardware capital of the world – an astonishing 9 out of every 10 of the world’s electronic components are produced here.

The objective of “Made in China 2025” has been initiated to promote specific economic sectors such as biotech, artificial intelligence and renewable energies. Part of this initiative involves encouraging the build-up of domestic expertise through targeted tax breaks and subsidies. The idea is having Chinese companies reach new levels of quality, sustainability, and innovation, so that they can compete with Western competitors on equal terms. The overarching goal is to shift China away from its traditional labor-intensive, low-wage manufacturing model to more technology-driven forms of working.

china's-economy-is-booming-thanks-to-the-massive-expansion-of-infrastructure

Economy in China is booming thanks to the massive expansion of infrastructure.

Seven of the ten busiest ports in the world in 2016 are on Chinese soil. Shenzhen is, by far, at the top of the list.

Volume by million TEU in 2016.
Source: Visual Capitalist, «Visualizing the World’s Busiest Ports”, as of 2016.

Projections for the Chinese economy could be exceeded

This year, the situation is likely to improve for equity investors in emerging markets. On the one hand, valuations have improved due to the recent equity market correction, even though there has been a slowdown in growth. On the other hand, although some initial progress has been made in tariff discussions, markets are not expecting the trade conflict to be resolved in the immediate future – in other words, expectations are currently low and may therefore be exceeded.

In the event of no solution to the trade dispute emerging, China possesses sufficient fiscal and monetary freedom of maneuver to stimulate growth itself. In addition, specific measures have already been introduced to strengthen the equity market in a targeted way. For example, the government has announced the creation of special liquidity facilities so that the market liquidity for mainland shares in local currency, so-called A-shares, can be supported at any time, while temporary investment can be channeled into healthy companies facing liquidity shortages.

Chinese economy still growing, albeit to a lesser extent

China’s long-term growth will remain strong and above-average in a global comparison, even if it is likely to fall short of levels achieved in recent years. At 6.2 percent, the expected growth rate for this year may have fallen back to the level of 30 years ago, but it is still twice that of the US, as well as much higher than expected global GDP growth of 3.0 percent. Also the cheap equity market valuations suggest that now is an opportune moment to enter the Chinese equity market or indeed build up current positions.