Has the China juggernaut hit a wall? That's the story the market seems to be telling. There's been a persistent disconnect between China's powerful economic growth and the country's stock prices. Despite annualized gross domestic product ( GDP ) of 10% over the past 16 years, stocks represented by the MSCI China Index have returned just 6% over that same time frame (source: MSCI as of 5/16/17). The gap between the two reflects a long-held skepticism about whether this extraordinary pace of growth can be sustained. In recent years, many investors have pointed to a host of indicators: relatively tepid GDP growth, a frothy credit market, widening social disparities, environment issues stemming from overdevelopment, and what they see as a slow policy response by Beijing. Strengthening in the U.S. economy has put China's current weaknesses into even sharper relief. While these are legitimate concerns, we believe this view on China is needlessly dark and based on outdated perceptions. I recently led a panel of BlackRock China experts, who shared their perspectives on what they see as an inflection point in the country's economic narrative. My colleagues noted that in the past few years, policymakers have in fact taken important steps to seek to address China's problems, particularly since 2013. For example, the government has introduced broad supply-side reforms to curtail overbuilding and unlimited access to credit. The result has been a "virtuous feedback loop": An improving global economy provides leeway for reforms and structural improvements, which raises economic expectations and ultimately real growth potential in China. Already we've seen increased earnings in the manufacturing sector, and overall consumer confidence is up. This isn't the shoot-the-lights-out growth that drove the old China narrative, but rather a normalization to okay-but-more-sustainable growth that has been supported by balanced policies and the unwinding of past excesses. The markets have only slowly embraced this next chapter-suggesting a possible entry point for investors to consider who are willing to bypass the consensus.
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