China in your hand

The formal state visit to the UK of Chinese President Xi Jinping this week coincided with official figures showing a fall in China’s GDP.

The National Bureau for Statistics in China stated that China's economy grew by 6.9% compared with a year earlier, significantly down from the 10% average of the previous three decades but higher than the 6.8% forecast by most economists.

Further fears were fuelled today when Beijing unexpectedly cut its main interest rate by 0.25%, the sixth cut since November last year. The main bank base rate is now 4.35% with the one-year deposit rate falling to 1.5% from 1.75%.

The announcement saw European stock markets bounce upwards as investors welcomed the boost from cheaper credit in China, as well as the possibility of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

So whilst David Cameron’s announcement of £30bn worth of collaborations with Chinese companies sounds like positive news, is it the right time to be forging closer links with the Chinese?

The reality is that whilst the Chinese are experiencing a growth slowdown at the moment, there are many experts who feel that the situation is not that bad, despite the reliability of the official GDP figures being widely criticised.

Because whilst growth is slowing, China is still continuing to grow and the International Monetary Fund (IMF) is projecting growth of more than 6% up to 2019. Such growth would add more than 1% to global economic growth. In terms of contribution, no other country comes close. Even if you listen to the statistical sceptics and take a lower figure for China's growth outlook, linking more strongly with China looks like an important business opportunity.

This is particularly so as it seems that China is re-balancing its economy. Following record-breaking growth in 2010 and 2011, which was driven by massive government spending, policymakers in China are looking to move the economy away from investment and export-driven growth towards consumer spending and services. And it seems to be working, with consumption contributing more to quarterly GDP figures and with retail sales up 10.8% in September, led by consumer electronics and catering.

This new approach could lead to new types of opportunity and a Foreign Office report suggests that the UK sectors that have a lot to gain are financial services, business services, pharmaceuticals and cars. As the Chinese economy develops and as businesses become more sophisticated, it is likely that they will start to need more specialist services, an area where the UK is strong.

Obviously, this new approach and the economic slowdown have impacted on some, mostly the emerging economies that are producers of industrial commodities - energy and metals. However, despite the current ups and downs and the re-balancing in progress, long-term, China will continue to be a major player in the global marketplace and the collaborations announced should be good news for the UK economy.

To discuss what this all means and how it could impact upon your long-term investment planning, contact Kellands.

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