Look out for:
- Indications the economy is performing poorly
- Sharply rising debt
- Signs of China devaluing the yuan
China’s 2016 got off to an inauspicious start, as fears over its manufacturing, economic and stock market slowdown caused chaos throughout global markets.
Most of the distress was felt at the start of the year, with Chinese regulators activating a suspension in trading twice within the space of a week. However, the intended safety measure failed to contain the chaos – instead it spread the selloff to European and US indices – and was quickly abandoned.
Panic around China’s economy gradually abated as the year progressed, but it never truly subsided. Traders will hope that Chinese regulators have learnt from the mistakes of 2016, but any sign that China’s economy is performing below expectations could provoke a global selloff once again.
China’s economy is currently growing at its weakest rate for 25 years, and is predicted to slow even further as demand for exports slackens and the government shifts its economic focus towards consumption and services. To counteract this, China has already pledged a more proactive fiscal policy – vowing to enhance control over local government debt in a bid to sustain steady growth – and has set a GDP target of around 6.5% for 2017, which would represent only a gentle year-on-year slowdown.
But rumours abound that Xi isn’t wedded to that target, choosing to focus his concerns more on rising debt and an uncertain global environment. Any indication that China’s economy is performing below expectations could see the markets panic again: starting with the China 300, then spreading to other indices around the world.
It’s also a time of heightened anxiety about the yuan, which slid to eight-year lows amid speculation of capital outflows in the wake of Donald Trump's election victory. USD/CNH will be a key market to watch, given Trump’s previous accusations of deliberate devaluation and increasingly prickly China-US relations.
Keep an eye on commodity stocks and commodity prices, too. These were badly affected amid the chaos of 2016, and could suffer once again if a decline in manufacturing or exports means China needs to reduce its oil and metal consumption.