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What’s in Store for the Chinese Economy in 2016?

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Most economic indicators still point to weakness

China’s exports and imports are down due to weak demand globally and falling commodity prices. The slump in exports has caused many small mobile phone assembling companies to shut their operations. China’s industrial production is also growing at a slow pace while manufacturing purchasing managers’ indices (or PMIs) are still in contraction mode. The reforms introduced by Chinese authorities may take some more time to show actual results.

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Due to the manufacturing slump, mutual funds such as the Oberweis China Opportunities Fund (OBCHX) and the AllianzGI China Equity Fund – Class A (ALQAX), which have a ~20.0% exposure to the industrials sector, may be adversely impacted. Further, revenues of the multinational companies such as Apple (AAPL), Nike (NKE), and Ford Motor Company (F) may be impacted due to a slowdown in the Chinese economy, as China is a major revenue driver for these companies.

However, China’s retail sales have been rising while the real estate market is also picking up, which is positive for the entire economy.

Financial reforms

In October, the People’s Bank of China (or PBOC) cut its one-year benchmark bank lending rate by 25 basis points (or bps) to 4.4%, the sixth rate cut since November 2014. On that date, it also trimmed the reserve requirement ratio (or RRR) by 50 bps to 17.5%, making it the fifth rate cut in the RRR since November 2014.

But still, the Chinese economy is fragile, and the Chinese authorities may have to undertake further monetary and fiscal stimulus in 2016 to get the slowing economy back on track. In order to achieve long-term economic growth and stabilization, China is aiming to change its focus from an export-oriented economy to a consumer-driven economy to reduce its dependence on export business in light of a slowdown in the global economy.

Outlook for 2016

The PBOC had already indicated in China’s Macroeconomic Outlook report for 2016 that the growth rate would remain relatively low. It has stated in its report that real GDP growth is expected to be 6.9% in 2015 and will grow at a lower rate of 6.8% in 2016. Meanwhile, PBOC assures investors that it would “flexibly” use various measures to maintain liquidity and reasonable credit growth in order to keep the yuan stable.

But in the near term, the road may be bumpy for China due to negative investor sentiment from concerns over China’s economic growth. Investors are advised to stay updated on the latest developments in China that can affect the performance of the China-focused mutual funds.

For more updates and analysis on mutual funds, please visit Market Realist’s Mutual Fund page.

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