22 October 2019
Xi Jinping's reforms drive and anti-corruption efforts are expected to help the Chinese economy return to stable growth path. Photo: Reuters
Xi Jinping's reforms drive and anti-corruption efforts are expected to help the Chinese economy return to stable growth path. Photo: Reuters

Why you should continue to bet on China

Stronger-than-expected October US jobs report has boosted the chances of a rate hike by the Federal Reserve in December.

The structural problem in employment which Fed chief Janet Yellen has been concerned about may be at a turning point.

Firstly, the unemployment rate has fallen to 5 percent. New non-agricultural jobs surged to 270,000, showing a strong rebound, and the hourly wage was up 2.5 percent year-on-year. The wage increase is larger than the CPI growth. So I think the Fed will no doubt move in December.

The US has been in loose monetary policy for more than seven years. Investors have been constantly speculating on what will happen after the fed begins the liftoff. However, the real effect can only be determined after the move is actually taken.

The impact on global asset prices will be real, a factor that may have contributed to the downward pressure on US stock indices recently.

China market prospects

Now, coming to China, people might find it hard to understand why the A-share market has been holding up quite well this month despite the looming US rate hike and poor domestic economic data.

All the economic numbers announced in the mainland recently have been disappointing, except the October retail sales data which showed strongest growth in year to date.

The Shanghai Composite Index has rebounded by nearly 28 percent, to above 3,600, since the low point in August. How did this happen?

The People’s Bank of China’s interest rate and reserve requirement ratio cuts were helpful. Given the expectations that the central bank will undertake such moves one or two more times in the near term, market liquidity is assured.

Observers believe the PBoC’s easing measures will have bigger impact on the domestic equity market than the potential US rate hike.

Meanwhile, President Xi Jinping’s strong leadership is also helping restore market confidence.

A series of heavyweight diplomatic moves — visits to US, the United Kingdom, a landmark meeting in Singapore with Taiwan’s leader, participation in international meetings in Philippines and Turkey and Africa — has demonstrated Xi’s aggressive leadership style.

Combined with anti-corruption efforts at home, the international diplomacy has helped boost the confidence of investors that China can make the necessary structural reforms in its economy.

While the economy may be lacking in solid fundamentals yet, people seem to be convinced about the execution capability of the top leadership.

Consumption now accounts for over half of China’s gross domestic product. There has been a big step forward, although it still lags the levels in the US or the Europe.

Authorities, meanwhile, have more stimulus firepower to boost the economy.

Looking at the overall picture, we can say that although the fairytale of the BRICS bloc may have faded, betting on China will still be a reasonably sound move.

This article appeared in the Hong Kong Economic Journal on Nov. 12.

Translation by Myssie You

[Chinese version中文版]

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head of private banking and trust services at Hang Seng Bank