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There Are Increased Risks For The Chinese Economy

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Trade Tensions Weigh On The Growth Outlook

The head of China’s state planning office, He Lifeng, says there are increased risks for the Chinese economy. His statement, made before the standing committee of the National People’s Congress, come as no surprise. China’s economy is showing signs of accelerated cooling in the wake of mounting trade tensions with the US. Over the past month, there has been a notable deceleration of investment growth as well as soft data pertaining to income growth and retail sales.

According to He, policymakers would have to put forth greater efforts if they were to hit economic targets. The intensifying trade war between the US and China is expected to continue putting pressure on growth but can be overcome through hard work.

Other signs the trade war is having an effect on China’s economy include exports and inventories. Exports have been shrinking for three months despite the impetus felt by US business to get ahead on orders to avoid future tariffs. Because of this, inventories have been rising and are evidence production output is outpacing demand. If this situation were to continue unabated it would lead to a contraction in Chinese manufacturing.

Industrial profits, a lagging indicator, show signs of slowing as well. The caveat is that growth remains strong on a year over year basis at 16.4%. To bolster growth in the future, and help offset the effect of Sino-US trade tensions, the government is speeding up infrastructure spending plans and keeping ample liquidity within the financial system.

Surprisingly, the August read on PMI came in above expectation at 51.3. This is a tenth hotter than expected and up a tenth from the previous month showing continued expansion within the Chinese economy and at a slightly faster pace. This is important to note because it suggests internal activity within China is strong enough to weather the trade storm a little while longer.

Fund managers at the Asia-Pacific Fund, Inc see near-term headwinds for China persisting. They do not expect to see the trade war resolved quickly although market weakness associated with it should be viewed as a buy-on-the-dip opportunity. The long-term outlook for Asia Ex-Japan is still quite positive, especially in China, so long as the fundamentals remain intact.

Looking ahead, volatility may persist in the market for an extended period of time as the US-China trade war drags on, but investors need not stay on the sidelines. From a bottom-up stock picking perspective, we remain constructive on Asia ex-Japan markets, where the consensus 2018 estimated earnings growth is 13.6%2 (up from 12.4% in 1Q). After the recent market correction, valuations of Asia ex-Japan equities have become more attractive at 12.42 times price to earnings, as compared to the January high of 13.7 times. We continue to see near-term market headwinds as buy-on-dip opportunities for long-term investors provided that the region’s macro fundamentals stay solid, particularly in North Asia.”

The Asia-Pacific Fund, Inc is a closed-end fund trading on the New York Stock Exchange under the ticker APB. It is managed by ValuePartners, Asia’s largest money manager, and pays a dividend worth 2.2% over the trailing twelve month period.