China will continue to be the “elephant in the room” in the markets but worries over the country’s structural challenges will have less global impact, says JP Morgan’s Stephanie Flanders.
Flanders, the chief market strategist for Europe at JP Morgan Asset Management, says if and when investors gain more confidence in the consumption-led recovery in the US and Europe, China “is not going to be the problem it seems now”.
“On paper the concrete links to other markets are not strong enough to pose a threat to the global economy right now,” says Flanders.
Concerns have been raised about the impact the volatility and market falls China has seen in recent months will have on the global economy.
The first week of trading in 2016 saw dramatic falls in Chinese markets compounded by the introduction of new circuit breakers, intended to reduce volatility. This had a knock-on effect on other global markets, leading to record falls for many.
However, Flanders does not think China’s problems will continue to dominate global markets.
China’s debt to GDP ratio is similar to that of many developed markets and “in basic terms” the country can afford to absorb those debts, particularly thanks to “a lot of foreign exchange reserves, which will preserve the currency value,” says Flanders.
She also points out that Chinese external debt is only 1.2 per cent of global GDP.
She adds: “We don’t see on paper a big connectivity between the Chinese market and other markets.
“However, that doesn’t mean we shouldn’t worry, especially for the strong connection China has with emerging markets.”