ANALYSIS: Don’t forget the trouble in China

Added 6th July 2016

As Brexit fatigue tightens its grip on us all, particularly those who have been writing about it for a living, and the US gets going with its election, things have been suspiciously quiet on the China front.

ANALYSIS: Don’t forget the trouble in China

China of course had been the principle trouble spot worrying investors around the world for much of last year and the beginning of this year, until Prime Minister David Cameron called the referendum that would ultimately unseat him.

A resurgence in the fears over China’s growth prospects and the associated implications for global demand is arguably a much bigger long term threat to financial markets than Brexit or the US election.  

Yet since January, very little has been said and written about an issue that has shown precious little sign of being clarified, let alone resolved.

China did make recent financial headlines on one occasion, and it was not for a good reason. MSCI announced a decision to delay including Chinese equities in it emerging markets indices in June. While this has little direct impact on Chinese companies or the nation’s economy it does point to a continued lack of confidence, and perhaps a fear under the surface that more rocky times are ahead.

According to PIMCO portfolio manager Luke Spajic it is not surprising that MSCI came to this conclusion.

"A resurgence in the fears over China’s growth prospects and the associated implications for global demand is arguably a much bigger long term threat to financial markets than Brexit"

“MSCI’s recent decision to delay including China’s local shares in its widely tracked emerging markets equity index reflects the views of its clients; namely, the global investors who use the index as a benchmark for constructing portfolios and measuring their performance,” he said. “To put the decision in perspective, China has the second-largest equity market in the world, and global investors will inevitably face the task of integrating these assets into their portfolios. But with the MSCI announcement, investors may be saying, ‘not yet’ ”Spajic added.

He explained that there are several reasons why investors would want to slow this process.

First China’s growth slowdown and uncertainty over its currency policy have created significant volatility in the country’s equity markets over the past year, notably last August and at the start of 2016.

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Alex Sebastian

News editor

Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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