He added: "The challenge at present is that the very high levels of debt in the economy are restricting their ability to make this change. The economy has definitely lost momentum, but it should achieve its GDP growth target this year, while next year could be more difficult.”
Deflation is a possibility
Lyons adds that there is a real possibility of deflation in China as consumer demand is low, while subsidies for items such as electric vehicles mean prices in some parts of the economy are artificially low.
TS Lombard chief economist Freya Beamish says one challenge for China’s growth outlook could be Donald Trump's projected victory in the US election, which as of today (November 6) looks likely.
This could increase the potential for tariffs to be imposed on Chinese goods, which would reduce demand for exported goods at a time when high debt levels are hurting demand from Chinese consumers.
The country’s economic model is based on escaping what economists call the middle-income trap — that is, moving away from being the lowest-cost producer of goods for export and instead becoming a buyer of other countries' exports, with the economy built around consumption.
At present, the capacity for the Chinese economy to achieve this may be hindered by the high levels of domestic and household debt, as this restricts the spending power of the domestic consumer.
Lyons says stimulus policies are likely to focus on improving the finances of local government to enable spending and to prevent house prices falling further.
If property values increase, consumers could potentially feel better off and so they would feel more confident to spend any of the gains from a fiscal stimulus.
This is known as the wealth effect. At present, China has a negative wealth effect, with consumer confidence hit because the value of their assets are falling, and so they feel poorer.
Investment perspective
Boardman-Weston says: “With all of the uncertainty, many allocators have simply decided that investing directly in China is too much hassle. But the effect of this is not really felt in the emerging markets as Chinese equities have become a smaller part of the index.
“Instead, the impact is likely to be felt by mining companies. They could previously always guarantee a certain level of demand because China was always building something, but that is gone now.”
He says European equities are also likely to suffer as a result of a weak Chinese economy, as those indices have large exposures to luxury companies, which have in recent years relied extensively on Chinese demand.
