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Investors encouraged by positive signals for China's economy

Investors encouraged by positive signals for China's economy

China reported its slowest economic growth for decades on Monday, but investors have received encouragement from a raft of positive signals pointing to a better second half of the year.

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By Meili Chen 21.01.2019

China reported its slowest economic growth for decades on Monday, but investors have received encouragement from a raft of positive signals pointing to a better second half of the year. This may result in fewer concerns about the country’s trade war with the US.

VP Bank recently said that China’s economy is a “bigger cause for concern” compared to that of the US heading into 2019. China has had to weather a string of setbacks that pushed annual economic growth down to levels not seen since the early 1990s. Factory and trade output has also slumped in recent months.

China’s current predicament appears precarious, but experts believe that prospects for the year could improve significantly because policymakers have outlined plans to implement more stimulus measures to boost the economy. Meanwhile, the possibility of a resolution to the trade conflict continues to strengthen.

US-China tensions dominated the narrative last year, and the tit-for-tat tariff battle has had a largely negative impact on both countries and financial markets around the world. While China has likely taken the greater hit overall, reports suggest a growing desire to strike a deal.

The world’s two largest economies are still adhering to the 90-day truce agreed upon at the G20 Summit in early December, which is set to conclude in March. Interested commentators have noted a less hostile atmosphere, as both sides warmly received negotiations in Beijing this month. More talks are in the planning stages.

The US prompted the original trade dispute as it looked to reduce China’s trade surplus and protect intellectual property rights, but more than six months of sparring appears to have taken its toll. Some reports have suggested that the US may even consider ending tariffs as it attempts to broker a deal.

Investors have positively viewed the shift in sentiment during the last month. LGT Bank now has a base forecast for a deal to occur in mid-2019. The company’s Chief Investment Strategist, Stefan Hofer, said: “The point is that both sides are now under a lot of pressure to get a deal done.” He added that this is “just something that has to happen."

Hofer said in early January that “brave” investors will be find ample opportunities in Asia this year, but he appeared even more bullish last week, stating that this is the best time to target Chinese markets. He commented: "I think it's perfectly okay for investors to take on China exposure now in anticipation of that.”

Eurasia Group said that there are “signs of momentum” for at least a limited trade deal and claimed that US President Donald Trump’s desire to reduce volatility in markets and provide a foundation for his re-election bid in 2020 is driving this scenario. However, Eurasia warned that progress is necessary on “core structural issues” if a deal is to take place.

Even without a concrete resolution, other experts believe that a calmer atmosphere with no further tariff hikes would represent a breakthrough, and when combined with China’s push for stimulus, it should pave the way for a more positive outlook.

IHS Markit said on Friday that China is unlikely to see a sharper slowdown in growth. The information provider added: “Economic growth should stabilize as the government releases additional stimulus, including corporate tax cuts, credit easing, infrastructure investment and looser real estate rules in lower-tier cities.”

Citi Private Bank Investment Strategist Ken Peng said last week that there will be “less worries” about trade conflict in 2019 but added that pressure on exports could continue during the first quarter due to the legacy of early stage tariffs. However, he also said that stimulus could offset the drag by Q2.

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