China to suffer from three Achilles heels

China is unlikely to provide stimulus to its economy and is overtightening its policy, according to Perpetual Asset Management Australia’s head of investment strategy, multi asset, Matt Sherwood.

Speaking on Money Management’s Asset Allocation Webinar, Sherwood said China was clamping down on excesses in areas like property and construction which was weighing on growth.

“In the end I would argue that China now has higher risk premiums attached to it, both from a direct investment perspective but also for countries who rely on China for growth,” Sherwood said.

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Also, with China enacting a more aggressive foreign policy, Sherwood said the ‘peace dividend’ that the world had enjoyed since the end of the 1980’s was now over – a fact he said was hard to manage in a portfolio.

He said China’s recent cuts to its bank’s reserve requirement ratios (RRR) was “pretty much an irrelevancy” because the issue in China was not the supply of credit.

Sherwood said he did not think China would provide stimulus to its economy, despite expectations in the finance community that it would.

According to Sherwood, China had three massive Achilles heels – its changing demographics, its growth strategy, and its poorly-structured balance sheets.

“China is in a great race to get richer before they get older but their demographics this decade are actually set to reverse, so the working age population in China is now set to contract this decade which is going to really strain their economy,” he said.

He said Xi Jinping was enacting China’s third iteration of its growth strategy and would now focus on the quality and distribution of growth rather than just the size of its growth.

Therefore, Sherwood said growing the Chinese economy quickly was no longer the regime’s goal.

“It's a very highly indebted nation for a very low standard of living. And if you have a lot of debt, you either want to grow your economy fast or you want to inflate your way out and I would argue you can't inflate your way out of shrinking demographics,” said Sherwood.

Sherwood said China was a “massive leverage play” and that regulatory changes were going to cause a lot of stress on their construction and property sector with significant spillover to other areas of their economy.

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