U.S. Markets closed

Opportunities in China: Bright Spots Sighted!

Ewen Cameron Watt of BlackRock

How Worried Should We Be about China?

(Continued from Prior Part)

Recapturing the spirit of optimism

But even the doomsday crowd in Hong Kong recognizes two bright spots:

  1. MSCI’s inclusion of 14 Chinese firms listed in the U.S. (via American depository receipts, or ADRs), including the e-commerce behemoth Alibaba (BABA), in global indices from November.
  2. The potential for a deal by mid-2016 on the Trans-Pacific Partnership trade agreement (this would exclude China but buoy Asian trade over time).

So, how do we recapture the spirit of optimism in Asia? Tackling China’s bad debt–recognizing how much, who owns it and how to restructure it–is the key. The trouble is this will take some time.

Market Realist – There are new opportunities in China (YINN) as the country shifts to a new normal. The economy is shifting gears from an investment-based, heavy-spending economy to a consumer-based one.

Christine Lagarde, the IMF’s managing director, endorses this view. In a recent interview with CNN, she stated that the slowdown is moderate in nature and “one that is actually expected and healthy.” As the country shifts away from manufacturing to an economy powered by consumer spending, a moderate slowdown is to be expected.

The economic shift can be evidenced by the changing trends in consumption of commodities (DBC) (DJP) by China (FXI). The previous graph illustrates findings from a recent Goldman Sachs note. The graph shows that consumption of investment-based commodities, which are usually tied in with capital expenditure, has slowed this year. While the consumption of commodities like coal, cement, and oil has fallen, consumption-based commodities like gasoline and coffee have seen an upward thrust.

Chinese retail and consumer sectors (CHIQ) are likely to remain boom sectors even in the future. The important thing to note is that not everything is doom and gloom in China (ASHR). The ballooning debt and financial sluggishness could continue to be concerns in the future. Investors should exercise caution accordingly. The Chinese middle class continues to increase at a rapid pace, and thus retail and spending could continue to be bright spots for the economy.

Read our series, Quarterly Performance Analysis: China-Focused Mutual Funds to find out more about the performance of China-focused products.

Browse this series on Market Realist: