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Written by: Nandini Ramakrishnan
26/10/2018
Over 2018, the US and China have been embroiled in escalating trade tensions. So how should investors think about China’s long-term growth picture?

The US started by imposing tariffs on solar panels, washing machines, and metals to start. The total dollar amount of these was relatively limited.

Then, in the summer, the US began taxing $50bn of Chinese imports, followed by a further $200bn.

China has responded by implementing three waves of retaliatory tariffs, though they are smaller in dollar amount. Investors are right to ask how much this will affect Chinese growth prospects.

Does China have what it takes to ride through the near-term trade woes? We believe yes, based on three key areas: policy response, demographics, and innovation.

In Q3 2018, China’s GDP growth slowed more than expected due to the weaknesses in infrastructure investment within fixed asset investment and auto sales within retail sales. This may remind us of the 2015 slowdown in Chinese growth.

However, unlike 2015, today corporate financials remain supportive with robust industrial profits and sustained corporate fundamentals. We expect the government to introduce different policy loosening measures to cushion negative growth shocks.

There are also options to increase fiscal spending, tax breaks for specific industries, and tax cuts for households. These should help stabilise market and economic sentiment in the near term. Monetary policy easing will also likely continue and there is still room for further targeted reserve ratio requirement cuts.

There are two key areas that can support China through these short-term pains – China’s population and rising incomes are a key structural support to the economy.

While population growth may be limited in future, the current rate of population growth is positive. More importantly, they have become far wealthier.

In 1980, most of China’s population earned below the poverty line defined by the Worldbank. Now most of the country is above that same line. This shift in incomes relative to the past and the rest of the world mean the growing middle class should be ready and able to spend.

Finally, innovation will be key to long-term success in China. Companies in the country are already world-leading in areas such as financial technology, supply-chain, and communication to name a few.

As a percentage of GDP, China used to spend 0.5% on research and development (R&D). Now, twenty years later, that same number is more than 2%. The US has been steadily spending 2.5% of its GDP on R&D over the past few decades with no increase. If China keeps up on the current path, it could overtake the US.

While investors should continue to monitor closely what happens to trade tensions in the coming months, the long-term story for China remains positive.

Nandini Ramakrishnan is global market strategist at JPMorgan Asset Management

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