The most recent economic data out of China confirmed that the economy remained incredibly resilient in the wake of slowing external demand and harsh policy tightening last year.
L ooking forward, business activity will likely continue to moderate. Our model currently predicts that GDP growth will continue to decline to about 8.3% in the first quarter, with no bottom yet visible, suggesting high odds that growth will dip below 8%. Nonetheless, barring a major global shock, our China Investment Strategy team expects the Chinese economy to be sluggish but able to avoid a crash.
It is important to note that the economy’s various trouble spots were able to withstand severe policy headwinds in the second half of last year, when the tightening campaign was at its maximum strength. The odds of an economic crash will likely decrease because the policy pendulum is clearly swinging back to easing. This should increase the availability of credit, reduce the cost of borrowing and help the economy to stabilize. In terms of the stock market, we suspect that investors have become pessimistic enough on both China’s cyclical outlook and structural fundamentals.
This means that the market has priced in enough bad news and is more likely to respond to positive growth surprises and policy reflation going forward.