China’s outlook in 2016 looks to be more complicated than ever. Consider the following:
1. The data out of China is difficult to measure and the economy remains soft like 2015
2. The Chinese authorities are unlikely to support any further credit stimulus as the corporate sector is already one of the highest leveraged in the world – see graph. However they have allowed the Yuan to devalue (1.5% this year so far) in order to help the export market
3. China’s foreign reserves have decreased significantly as locals and foreign investors take money out of China – the Yuan would have fallen further is it wasn’t for foreign exchange intervention.
4. Investors are wanting to exit the stockmarket – 12% down in 2016. This figure would have been higher if authorities didn’t curb the trading and buying of stocks. Although the stockmarket is down 40% from its mid 2015 high it is basically unchanged from a year ago.
The Chinese economy needs more stimulus and that the currency and stockmarket should fall further – a lower currency would also support growth. On a positive side low Government debt and vast foreign exchange reserves are the ammunition to tackle the downside economic risks.
Source: NAB – Australian Markets Weekly – 11th January 2016