Why investors should stay cautious on China

ON ASIA PACIFIC

After the 23% return of the MSCI China Index last year in US dollar terms, Chinese stocks have started correcting in the past two months.

An unexpected easing in GDP growth to 7.7% in the first quarter and the rising presence of policy risk has clouded the picture of China’s economic recovery. Corporate earnings announcements in Q1 also failed to excite the market. Although earnings numbers were decent, companies in general gave cautious guidance for the coming year.  A number of recent policies have also had a negative impact on sentiment.  The new political leaders have started an anti-corruption and austerity campaign, limiting spending by government agencies as well as state-owned enterprises. This is having a negative...