The current economic climate in China is leaving many investors uncertain as to what market activities will take place next. At this point, there are very few who are not aware that the noticeable slowdown in their economy is a potential issue.
Analysts have suggested that the weakness in China’s economy is in part related to government policy. The Chinese government has set itself the goal of implementing market returns, such as allowing its currency to be more responsive to market forces.
Unfortunately, we are discovering that the more reforms it tries to implement, the greater volatility there is in the market, at least for the moment. Perhaps in the long-term, their policies will prove to be beneficial in terms of redirecting economic forces in the right direction.
At present, however, it appears that moving in the direction of greater reform including attempts to move the economy from investment and export-led growth to consumption-led growth is only leading to increased volatility.
Additionally, Chinese government policy can change very quickly, and in a not particularly transparent manner. The government still has enormous resources at its disposal and could, should it so choose, implement a fiscal stimulus programme similar to that put in place in 2008. While I am not saying they will do this, it is important to remember that they could do it, should they so wish.
So, while it is reasonable to expect China to continue to be a source of market volatility, we must also bear in mind that there is a possibility, however small, that Chinese government policy may change. While the probability of this may seem slight, such a possibility existing at all suggests that on principle we should not be wholly pessimistic about China, even if the odds suggest that there will continue to be volatility associated with the Chinese economic situation.
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