We see downside risks to growth in China. Potential indicators of a slowdown are not yet reflected in official GDP figures, which showed 6.7% GDP in the first half of 2018, and which, despite a slight dip in Q3, remain broadly on track to reach the stated full year target of 6.5%. Over the year there has been a dramatic deceleration in fixed asset investment, led by falls in infrastructure spending shown by a dramatic fall in issuance of local government ‘special bonds’ (that are used to finance this spending) in the first half of 2018. This has been a result of domestically-driven economic headwinds in China.
Authorities originally appeared content to allow this financing to slow down, given domestic deleveraging efforts and a benign global economic backdrop. However, escalating tensions with the US has prompted China to restart monetary and fiscal stimulus. In the second half of the year, there has been a material rise in local government financing, which is expected to translate into fixed asset investment numbers, naturally subject to a lag. We will closely watch those numbers over the coming months. If a material increase in investment does not occur, it would be a concern for growth, particularly if trade tensions with the US continue to rise. In a risk case scenario, Chinese quarterly GDP could drop to as much as 5.5% in our view, which would be significant for global growth, particularly in regions such as Europe, Australia and New Zealand.
Colm McDonagh, head of emerging market fixed income. Insight Investment – a BNY Mellon company