For a market dependent on synchronized global growth, investors may be betting too much that China will not rock the boat next year.
Part of the S&P 500's rally to record highs this year comes on the back of better economic growth around the world. A major contributor to that growth was stability in China as leaders prepared for a key 19th Communist Party Congress this fall. Now that the congress is over and Beijing looks set to take action on its growing debt problems, worries about a sharper-than-expected slowdown in the world's second-largest economy could hurt U.S. stocks.
"With the 19th Party Congress now behind us, the risk is that the peak growth in China is also behind us," David Woo, head of global rates, FX and EM FI strategy & econ research at Bank of America, said in an outlook report. "Curiously, the market has been ignoring the string of negative Chinese data surprises in recent weeks. It is possible that the market views them as temporary."
"We are concerned that China could be vulnerable to US tax reform getting done," Woo said, noting that a resulting increase in U.S. rates and the U.S. dollar would likely cause capital flight from China to accelerate and weaken the Chinese yuan. If that happens, China's central bank would be likely "to tighten liquidity, which in turn would raise further concerns about the growth outlook," he said.
"In our view, China is transitioning to a slower and more sustainable economic model and a potential phenomenal investing backdrop," Krishna Memani, chief investment officer at OppenheimerFunds, said in the firm's outlook. "If anything, we are even more optimistic now about China in 2018 and beyond."
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