- Supply side reforms will look to remove excess capacity
- Emerging markets were hit by a slowing Chinese demand
- Reforms will not be enacted soon enough
Standard Life Investments, a global investment manager, suggests that structural reforms in China will play an important role in determining the trends of global financial markets in 2016. In the January edition of Global Outlook, the manager also shines a spotlight on emerging markets, examines the global economy into 2016, the outlook for US bond markets and sterling, and drivers of global equities.
Alex Wolf, Emerging Markets Economist, Standard Life Investments said: “In China, we expect policymakers to continue walking a tightrope - balancing enough fiscal and monetary stimulus to prevent a sharper growth collapse, while slowly proceeding with supply side reforms to remove excess capacity. Slowing Chinese demand, which we believe was worse than official data reflected, was one of the largest causes of the emerging market trade and output contraction experienced last year. As such we see some room for cyclical upside, as policy measures take effect.
However, our longer-term outlook on China has become increasingly negative. Our own view is that GDP growth is closer to 5% than the 6.9% reported by the Chinese authorities. Although we believe policy makers will avoid a hard landing, it is becoming more likely that Chinese leaders will not enact necessary reforms quickly, especially of state owned enterprises (SOE). SOEs are at the heart of China’s problems, and reforms here would deliver the biggest dividends from a growth and rebalancing perspective, but Beijing has been dragging its feet."
According to Standard Life Investment, SOE reform plans delivered over recent months were received with optimism, but they believe they failed to address corporate governance issues or the reduction of excess capacity through corporate restructuring and closures.
“Consolidation has been the preferred path, and the government seemed unwilling to sell or reduce state assets in a meaningful way. The plan will lack effectiveness if the focus on addressing loss-making companies and overcapacity is limited to a small number of centrally-owned SOEs, and not the mass of locally-owned SOEs, where most of the overcapacity and inefficiencies lie.
If China growth does disappoint this could drive continued volatility in global markets. Sluggish growth is priced into markets but a hard landing which impacts on currency, capital flows, commodities and social stability is not. This could result in more aggressive domestic monetary easing, forcing the renminbi lower against the dollar, with adverse implications for global inflation and a blow to emerging markets dependent on robust Chinese demand for manufactured goods and commodities.”
You can read the Outlook in the following link.