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Why China Matters

China matters. Even if you aren’t currently allocating to onshore Chinese assets. What happens in Beijing can affect your portfolio wherever it is invested.

Click here to  access The Evolution of China’s Capital Markets.

The most notable aspect of the Chinese stock and currency market correction over the summer of 2015 was not, perhaps, the scale of the losses or the government’s intervention. Rather, in our opinion, the knock-on effects for global markets defined this turbulent period. Following the onshore stock exchange crash and Beijing’s 3% devaluation of the renminbi, many south-east Asian states found their currencies under pressure, oil prices hit near-six-year lows and stock markets across the developed world sustained heavy sell-offs as investors ran for safety.

For the past five years or more China has been rebalancing to make consumption a bigger part of the domestic economy than investment, and services a more important driver of growth than manufacturing. Until 2015 Beijing had largely seemed to have facilitated a controlled transition, but reduced state investment in major projects and a large credit overhang, particularly in the real estate sector, set against aging demographics and slowing productivity growth, is proving a challenge for the government of President Xi Jinping.

For us, the turmoil on global capital markets on 25 August 2015 that followed an 8.5% fall in the Shanghai Composite index, was further evidence that the global investors have not yet worked out what the economic slowdown in China means for the world economy. The globe’s increasing interconnectivity and the complexity of supply chains and financial systems means that it is more difficult to discern where the impact of events in China might occur or the impact that they might have on global asset prices.

Even if we do not yet fully understand the interconnections between global markets, companies and countries, there is little doubt in our minds that China is going to play a major role in determining the trajectory of the world’s economy in the years to come. So with China, now the world’s second-largest economy, going through a period of profound change, it is crucial for investors to gain an understanding of the impact this will have on global capital markets.

Click here to access The Evolution of China’s Capital Markets.

Foreign investors have historically had limited access to the onshore Chinese market and limited visibility on Beijing’s policy-making processes. Consequently, they are likely to find it difficult to discern the broader impact of the internationalisation of China’s currency and capital markets and the meaning of monetary and fiscal policy moves.

One thing that has become clear, however, is that whatever Beijing’s policy response to steering the country through its major economic and financial transitions, it is not going to be familiar. China is choosing to experiment to find the right solution. Instead of taking a top-down, ideological approach, Beijing has adopted a more pragmatic attitude, making small regular adjustments to various policy levers to find out what works. As recent experience demonstrates, the entire world has an interest in the result.

We have long believed that China will one day be a vital investment destination for the world’s investors. While it may not be a natural investment destination for many asset owners in the near term, this is likely to change in years to come. This is a time of momentous change for China and we believe that it is a good time to start to engage with the events on this major new force in the world economy.

The Evolution of China’s Capital Markets, the third annual journal from Investec Asset Management’s Investment Institute provides a balanced introduction to the role of China in the global markets and the wider investment opportunities it presents.

Click here to access The Evolution of China’s Capital Markets.

Click here to learn more about Investec Asset Management.

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