September data from China offered plenty of welcome surprises, with faster-than-expected growth, falling unemployment, and a glimmer of momentum in consumption. But investors are not rushing to buy into the story.
The world has grown accustomed to a China that turns in enviable economic results, and a slowdown is causing anxiety. Investors are wondering what will replace property investment and infrastructure spending as a driver of economic growth. Xi Jinping’s vision of a consumer-focused economy has yet to take hold, and even if it does, the country will face an uphill struggle to keep its economy on track.
For now, Beijing is attempting to nudge the economy and various measures to boost investment in areas that serve policymakers’ priorities. These efforts have yet to deliver the promised results, however. The government’s decision to ban online tutoring services has compounded a slowdown in e-commerce, the country’s second-largest industry. This move has driven up the cost of in-person tutoring and pushed some families out of the market entirely. A decline in home prices and rising interest rates have also weighed on housing and other fixed-income investments.
Meanwhile, manufacturers have slowed production and a reversal in the revaluation of the currency has pushed up input costs. Those factors are taking their toll on the manufacturing sector and are weighing on overall economic growth. Xi is aiming for an economic revival and has outlined ambitious goals. However, it needs to be clarified whether the country can meet those objectives or whether Beijing will successfully reset market expectations.
Veteran investors point to a growing chorus of warnings that China’s economic policies are overextended and are setting the stage for deflation. It would be a mistake to ignore that risk and hope policymakers can catch the downturn before it gets out of hand.
A slowdown in the economy and a reversal of market expectations could amplify the pain for the global financial system, including the US. That’s why it’s crucial for investors to ensure they have a well-diversified portfolio that includes assets outside of Chinese stocks.
