Mark Mobius, the veteran emerging-markets investor, has warned that a full-blown trade war between China and the U.S. threatens to rattle foreign investors who are eyeing opportunities in the second-largest economy.
The former Franklin Templeton star fund manager, who earlier this year set up his own emerging-markets investment venture, said China’s slowest quarterly growth rate in almost a decade isn’t the biggest risk facing the country.
“There really is no major problem with the Chinese economy in terms of its growth path,” said Mobius.
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“The country is still growing at a rapid pace, but the growth has been on the back of an enormous supply of credit emanating from the government banks directed by the Communist Party to feed credit to the provinces and companies, particularly the state-owned companies.”
Last week, China’s National Bureau of Statistics reported GDP growth of 6.5% for the third quarter — the weakest quarterly growth figure recorded by the country in almost a decade.
The slowdown last week was enough to spook global markets and create a Chinese equity-market selloff that amplified a downturn in China’s Shanghai Composite Index SHCOMP, -0.19% and the Shenzhen Composite Index 399106, -0.17% . Both benchmarks are in bear-market territory, defined as a decline of 20% from a recent high.
However, Mobius said the efforts by China’s government to bolster confidence among foreign investors in the country’s stock indexes could be scuttled by an intensifying trade clash with the U.S.
“There is a luscious $300 [billion] trade surplus with the U.S. [and] Chinese leaders certainly don’t want to give that up, since it would mean tighter credit conditions, falling earnings for many companies and, most importantly, the possibility of unemployment growing,” said Mobius.
The investor said a full-scale tariff war with the U.S. could pose a significant risk to Chinese employment levels, particularly if the Donald Trump administration insists that U.S. companies, such as Apple Inc. AAPL, -1.59% , produce all of their products domestically.
“This is a major problem for China,” said Mobius.
Growing military tensions between the two countries in recent months could also pose a significant risk, especially if the Trump administration responds by imposing sanctions.
On Monday, the U.S. Navy sailed two warships through the Taiwan Strait, in an attempt to demonstrate “the U.S. commitment to a free and open Indo-Pacific,” Cmdr. Nate Christensen told the Wall Street Journal. In late September, the Chinese government denied a U.S. Navy ship’s request for October to dock in Hong Kong.
“It seems far-fetched now, but it also seemed far-fetched with Russia not too long ago,” said Mobius, referring to the Trump administration’s imposition of fresh sanctions against Russia.
“For foreign investors the outlook is worrying,” Mobius said.
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