Since mid-June, the Chinese A-share stock market has undergone drastic volatility, with deteriorating economic and profit data unnerving many global investors. A close look at what is actually taking place on the ground in China, which we recently visited, provides a clearer understanding of the opportunities and risks.
Amid investor unease, the Chinese government's remarkably stable GDP growth reports of 7% for Q2 and 6.9% for Q3 have created an increased concern over the legitimacy of the official reported figures. In an attempt to counter this slowdown, the government has rolled out a series of measures designed to stimulate demand. It has cut interest rates and/or reduced bank reserve requirements seven times this year, released funds for infrastructure investment, cut taxes on automobile sales and lowered the required down-payment for home mortgages.
Historical precedent suggests that as China transitions to a “middle-income” economy, the path of least resistance is downward.
There are three main keys to understanding the opportunities and risks that China poses: