Travelling to take advantage of the opportunities that arise through meetings with local managers, the Kairos multi-manager team recently had occasion to explore the situation in China. Most of the contacts with whom they met emphasized that the new administration’s attempts at economic reform to the detriment of growth will continue to fuel uncertainty in the short term. Weakening macroeconomic data could persist in the near future, but no one expects there to be a hard-landing, since the government seems willing to prevent it through ad hoc stimulus measures.
Currency weakness is also to be considered as part of the reforms, with the Renminbi down 3% from its peaks. China’s central bank has artificially caused this decrease to create downwards volatility before the widening in the trading range. The purpose of a weaker currency is to discourage further speculative inflows, which China has seen in recent years as investors seek an easy carry trade. Most managers do not subscribe to the view of a currency crisis, since China remains a country with both a current account surplus and a trade surplus and has the largest currency reserves in the world.
Fighting corruption is still a top priority for the new administration. The disciplinary commission headed by Wang Qishan, one of the most visible figures on the Standing Committee, has already completed several investigations of middle politicians and, if we are to believe the rumors, some top names could be next in the months to come. While these steps are positive for the system in the long term, they will have short-term repercussions on the growth and earnings of certain companies, especially in the luxury goods sector.
Although there is caution in the short term, urbanization and domestic consumption trends continue to bolster the new economy sectors, which will drive the performance of funds in the next few years as well.
by Moreno Tatangelo