China’s shift to self-reliance forces investors to readjust: Amundi

Investors are being urged to consider the “predominant forces” shaping China’s investment and policy landscape when it comes to their portfolios, as the nation shifts toward “self-reliant” strategies.

Alessia Berardi, Head of Emerging Macro Strategy, and Claire Huang, Senior EM Macro Strategist, at the Amundi Investment Institute said geopolitical tensions and a “distinct internal governance philosophy” were the key drivers of China’s recent investment performance.

“Heightened tensions, particularly with the US, have steered China towards a strategy focused on self-reliance. Consequently, China is compelled to reinforce its industrial policies, aiming to secure its supply chain independence and bolster manufacturing capabilities,” Berardi and Huang said.

“Internally, a critical reassessment among policymakers, informed by the drawbacks of past stimulus measures, has underscored the necessity of rebalancing the economy. The global context conveniently supports this shift, which provides a persuasive justification for the government’s leaning towards austerity and structural reforms over stimulus measures.”

Berardi and Huang also indicated that investors should consider “readjusting to recalibrations” as China continues to develop its future policies to:

• “Prevent excessive financialisation, potentially reversing some past liberalisation efforts that resulted in unconstrained expansion of capital;
• Strengthen industrial production capacities, particularly at critical points in the global supply chain; and
• Selectively open up the economy to strike a balance between national security and economic development.”

“Given these strategic choices, the outlook for traditional stimulus measures, commonly favoured by the markets, appears limited,” Berardi and Huang said.

“Instead, China is likely to maintain modest fiscal deficits with a strong emphasis on fiscal discipline, complemented by gradual monetary easing. Policies are likely to act as a force that depresses inflation, warranting cautious assessment.”