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INVESTMENT: How to invest in China in 2017, A Macro View
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How to invest in China in 2017: A Macro View

By Anthony Lawry

The New Year brings with it a new set of challenges, uncertainties, potential volatility, and overall ambiguity surrounding where to park your money in form of Chinese investment. Recent hostilities from incoming President Donald Trump is mostly on this analyst's mind with regard to the future relationship between the United States and China, which is hands down the most important bilateral relationship in the world economically. President Trump shot from the lip, accusing the Chinese government of currency manipulation to make their currency artificially weak (currently an inaccurate claim) and suggested he may even slap an all-encompassing 45 percent tariff on all Chinese goods entering the US if the Chinese didn't change their tone.

Because of this, a trade war appears more possible now than ever before, a phase that would bring about vast degree of economic contraction. Neither side wants this, but Trump appears to be playing with global economic stability in order to gain political points among his base at home. Further exacerbating these concerns is his complete lack of understanding in global macroeconomics, a string of failed businesses and his faith in various advisors who are ardently anti-Chinese. This makes investing in China, right now, a tricky science which is subject to unforeseen events and incalculable hostilities that may erupt.

Furthermore, the political and militaristic relationship between China and the US may erupt as well. It would be unwise to assume that Trump's musings over Taiwan and the South China Sea will not affect the economic relationship as Trump claims he will sue the issues as bargaining chips to get a better economic deal. Because of this, investors must look at the political risk that may impact the economic relationship between the two countries.

Meanwhile, the economic picture of China is quite mixed. There are positive and negative signals that 2017 may be a more upbeat year for investment in China while others signal the opposite. GDP figures are likely to be lower than 2016's 6.7 percent. This probably means that exports and imports will be lower as well. Furthermore, many Chinese nationals have poured their yuan into bitcoin to funnel their money out of the country, avoiding a government crackdown on capital outflows and retreating from an increasingly inflated RMB.

Yet, inflation has been low creating breathing room for increased fiscal stimulus which could be a shot in the arm of the Chinese economy. Over the past few years, nearly $100 billion in US treasuries were sold off in order to fund stimulus and to hold up the stock market. This trend resulted in China no longer holding the position of being the largest holder of US treasuries, but bolstering the economy in exchange for this title is not necessarily a negative trend. It signals that officials are willing to continue helping the overall macroeconomic picture. Additionally, Trump has also signaled that he wants to improve stimulus, lower taxes, and bolster US businesses. This has resulted in one of the best US stock market rallies in almost two years.

An additionally hopeful trend is the government's measures making it easier for foreign companies to invest in China. Officials' mandating that they would reduce the maximum amount of money allowed to invest in Chinese equities in addition to more access within the economy broadly is a welcome move. Because of increased economic liberalization in the marketplace, the opening for large moves upwards in overall equity indices or funds is higher now than any other previous levels.

Now, where does all of this leave us in terms of where to actually invest in? Despite tensions rising between the two nations, there are more in positions of power or influence who want the economic relationship to succeed than those who don't. Traditional equities are still risky, yet the Hang Sang saw a somewhat success at end of 2016 than its Shanghai and Shenzhen counterparts. Mutual funds and electronically traded funds in these markets may receive higher returns because of the importance of economic success that 2017 brings both in the United States and China as leadership changes are occurring in both countries. Individual stocks are also interesting in large cap metals. With rising commodity prices, industrial metals saw a huge 2016 and the prospect of higher yields here could be quite high.

Furthermore, large cap oil companies are increasingly appetizing. With large-scale international deals to lower oil production, 2017 could see a much higher level of oil prices. If you are more of a pessimist on the economic outlook, precious metals may be more suitable for your appetite as there are various Chinese mining companies that can be invested in, all of which would gain from higher gold, silver, and platinum prices.

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