China heading for soft landing, says AGI’s Michael Konstantinov

Michael Konstantinov, manager of the Allianz BRIC Stars fund, sees signs that China’s economy will have a soft rather than a hard landing.

Although the Chinese economy has shown continued signs of deterioration, we maintain our view of a ‘soft landing’ scenario.

Government policy actions to support economic growth have, so far, been limited. In fact, we believe the reason why the Chinese government has not eased policy aggressively is because they do not wish to create another bubble situation, particularly relating to the burgeoning property market.

The recent extension of quantitative easing policies in the US and Japan could lead to greater flows of money into China and other emerging markets. These flows make it harder to manage the economy as it increases inflationary risks.

This, therefore, limits the government’s flexibility from a monetary perspective and they are much more reluctant to support economic growth with stimulus.

However, on our current forecast, this should hopefully be necessary as we believe the economy will still grow between 7% and 7.5% this year. In India we have seen several positive developments from a policy perspective.

Recently, the government reduced subsidies on diesel and cooking gas. This has pushed up the price for Indian consumers but also relieves pressure on the growing budget deficit.

This price reduction was then followed by the government loosening the rules on foreign investment in local retail and airlines and plans to privatise several state owned companies.

This has elicited a positive response from markets with the hope that this flurry of announcements will be carried through via concrete reforms.

The Indian IT sector has seen some disappointing results of late which point to the potential slowdown of growth in the outsourcing business model particularly relating to financial services and pharmaceuticals.

A slowdown in global growth, coupled with competition and falling profits, have led many businesses to reassess their outsourcing. This leads to many questions about the growth prospects of the outsourcing industries which have been important to India’s success over the past two decades.

It is vital the government implements structural reforms to ignite growth momentum in underdeveloped domestic sectors such as retail.

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