Investor options for the Chinese economy in 2019

China's rate of growth will gradually slow over time, and the forecasted growth of 6 to 6.5 percent is part of this process. This is inevitable and a characteristic of maturing economies, so it is not cause for concern. The rate of slowdown in 2019 will be impacted by a range of factors. Trump's trade war is a negative, but the Belt and Road Initiative is a positive. Contraction caused by one factor may well be counterbalanced by expansion in the other.

We expect to see an expansion of domestic business activity to satisfy growing domestic demand in China in 2019. Domestic demand is changing the structure of the economy and moving it away from its previous levels of reliance on exports.

The increase in MSCI weightings for China will attract more investment capital to the market, and this will help reverse the current Shanghai Index down trends. Many companies are currently trading below value. This offers good investment opportunities. Capital account liberalization through programs like Bond Connect and the London Stock Exchange connect will encourage international capital investment, which sustains economic growth.

The government will assist with tax and fee reductions in selected areas to improve competitiveness. This, combined with increased credit access for small-and medium-sized enterprises will help support and increase innovation and business expansion.

Investors need to consider and take action on five factors for the 2019 economic outlook.

The first is the Belt and Road Initiative. Investors will look for companies that are actively engaged in the Belt and Road Initiative, because this is where market expansion and market substitution will be found. Export industries will restructure and reorient to serve expanding middle-class markets rather than the mature slow-growth US market. The Belt and Road will contribute to an increase in infrastructure spending with special purpose local government bonds.

Second is Chinese innovation.  Despite attempts by the US to use "security concerns" to reduce commercial competition from Chinese products, there remains plenty of opportunity to invest in new technology that uses Chinese protocols and standards. This will become an irresistible force in Belt and Road countries and deliver economic growth.

Third is Trump's tariffs. Contrary to some expectations, this will lead to a US economic slowdown. Many US companies are deeply embedded in their relationship with China as their primary source of profits. This includes companies that do business in China like Starbucks and Apple. Other companies, like Walmart, rely on Chinese products in their supply chains or on their shelves. US tariffs kill both these business models. Investors will sell Chinese companies that rely on doing business with the US. They will buy companies involved in the Belt and Road Initiative.

Fourth is Trump's trade war. This is aimed at destroying the global trade order and the effectiveness of the World Trade Organization. Investors will focus on defensive stocks that derive profits mainly from the domestic Chinese market. A slight economic slowdown will be led by companies exposed to US trade, but this will be counterbalanced by steadily growing demand from Chinese consumers.

Fifth is the need to be alert for supply chain disruptions, particularly for those companies that rely on US based or influenced supply chains.  This disruption closes access to some markets or makes some business activities more difficult. Investors will rebalance their portfolios to reduce exposure to disrupted companies. This may also offer future opportunity as these companies develop alternative supply chains or product substitution.

China's economic growth will slow in 2019, but it's like pruning a fruit tree prior to winter. Growth slows but energy is redirected, and spring sees a resurgence in new pathways.

The author is an international financial technical analysis expert and special consultant to Axicorp.

The opinions expressed here are those of the writer and do not represent the views of China Daily and China Daily website.