Economic forecasts for China are likely to be downgraded further and the risks of a near-term hard landing have risen, according to Standard Life Investments.
The asset manager asserts that the growth model which has served China so well over the past two decades is breaking down and there is more uncertainty that the improvement in employment prospects and real incomes which have been promised will ultimately come through.
It adds that at some point a “reset” may be necessary to put the economy on a more sustainable path, even if it means a short period of very weak growth.
The investment manager believes that while a genuine near-term hard landing is still a risk rather than a central scenario, the risks have increased and the widespread confidence that the central authorities can effectively choose how quickly the economy will grow has been exaggerated.
Standard Life Investments senior international economist Jeremy Lawson says: “The implications of this new reality are currently being priced into financial markets; our house view has been tactically light in emerging Asian assets for some time. As far as the Chinese stockmarket itself is concerned, our view is that as long as a major crisis is averted, then much bad news is already priced into the local stockmarket.
“The nature of the structural reforms that are announced at this autumn’s party conferences will be an important trigger for investors to assess where next to position their portfolios for the China story. A cautious approach to reform may help prop up growth in the very near term but it would probably come at the cost of making internal imbalances worse and thus the eventual unwind more economically and socially disruptive.”
Figures published today show that the HSBC China Manufacturing Purchasing Managers Index posted an 11 month low of 47.7 points in July, down from 48.2 in June, signalling a deterioration of business conditions for the third consecutive month while production levels at Chinese manufacturers declined for the second month in a row.