China still raises concerns, Amundi says

In Amundi’s latest strategy review, Philippe Ithurbide, Amundi’s global head of Research, Strategy and Analysis, says the manager still worries about China’s situation.

“China remains our core concern because a hard landing by its economy would lead to an additional wave of capital outflows from the emerging markets.

Two crucial considerations should nonetheless be kept in mind:

– What is happening in China is not particularly extraordinary.

The problem is that it has not necessarily been correctly or fully “priced in”. Indeed, it is normal for a country’s growth and savings rate to diminish over the course of its development. All countries (the United States, European countries, Japan, South Korea, etc.) have gone through this. It is also normal for a country’s potential growth to fall in line with declines in productivity gains and a shrinking working-age population.

We have pointed out on numerous occasions—and it is a well-known fact—that demographics and productivity determine the bulk of potential growth. What is striking—and undoubtedly less well-known and certainly not priced in—is that China’s potential growth has been cut in half in little over a decade. Though still not a rich country, China has the demographic problems of a developed country.

It is already an “old country”, suffering all of the problems of major stagnation, from unfavourable demographics to weaker productivity gains and a large debt burden.

– China’s domestic demand remains relatively strong.

The source of concern is the fact that growth is diminishing and the composition of growth has changed. Indeed, China is in the process of shifting from an export-led model, in which exports serve as the main driver of growth, to an internal demand-led model fuelled by investment and consumption.

In itself, this development is highly favourable for the global economy. But such a shift in growth models, and decline in potential growth, is however clearly not without its bumps in the road. And we are experiencing precisely such a process today.

“Is China’s growth ultimately headed to the 3-4% level? The answer is yes. Will it be at this level in 2015 and 2016? We believe it will not. Does China still have the means to maintain growth of around 6%? We believe it does. Is China’s central bank in the process of orchestrating a major devaluation of the yuan? Certainly not, though the developments in August generated legitimate concerns.

“Will the shift in the growth model mentioned above continue moving forward? Absolutely. China’s new normal is weaker, domestic demand-driven growth and potential growth of 3-4%.”

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