CONTRIBUTORS
Christy Tan
Senior investment Strategist
Franklin Templeton Institute
Priya Thakur, CFA, CAIA
Analyst
Franklin Templeton Institute
Karolina Kosinska, CIPM
Analyst
Franklin Templeton Institute
Preview
For most of the past 40 years, investors, policymakers and interested observers have become used to the idea of China as a fast-growing, emergent economy, well on its way to achieving middle-income status, with every hope of continuing along a path of resounding economic success.
Recently, however, a different story has surfaced. This one portrays China as stumbling badly, weighed down by long-term challenges related to excess debt and investment, an aging population, the end of globalization, and the adoption of policies inside and outside China that may frighten off investment and consumption.
In our view, the truth about China is neither as optimistic as some had earlier believed, nor as pessimistic as is currently fashionable. Rather, the central narrative is one of China in transition. China is shifting from an economy underpinned by extraordinarily high and probably unsustainable rates of savings, investment and debt accumulation to something else.
Such a transition is not easy, but it is also not unusual. At similar stages of their development, other countries, including the United States, Japan and various successful East Asian economies, witnessed something similar.
In this paper, we try to better understand how China is in transition and offer some insights about how investors should anticipate change. We consider the following scenarios:
- The middle kingdom evolution: What’s shifting beneath the surface?
- Decoding China’s success
- China’s hurdles: unmasking major challenges
- Unleashing the dragon: Exploring opportunities
- How should investors judge opportunities and risks in China?
Whether investing in China directly or into themes that are linked to China’s economic prowess, the set of opportunities and risks related to China investment strategies is fundamentally shifting. What has worked in the past may not be so fruitful going forward. But fresh opportunities are also arising.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.