As China comes off the back of a period of rapid growth it is worth considering whether this is an intentional slow down initiated by its government in much the same way developed market nations have done over the past few years or an emerging market nation responding to forces acting on and around it.
According to Van Eck’s Semple the decline in China’s growth seems to be controlled and expected as the government attempts to transition its economic model to a consumer-based model.
He also makes the point that while the Chinese economy has grown, benefitting emerging and developed markets, which provided much of the raw materials, a slow-down should not be seen as the government jumping on the brakes.
“The decline is perceived as rapid only in developed countries,” Semple said.
“The decline is normal and expected and should serve as a positive in the long term as the government is forced to implement reforms and be more efficient. This, in our opinion, will lead to growth that is more sustainable in the long term.”
“The impact of this slowdown on emerging markets is probably negative, as China’s thirst for commodities continues to decline and hurts commodity-sensitive companies and countries.”
Alliance Bernstein’s Suzuki also regards the slow down as intentional in that the rapid growth of the early 2000s was unsustainable for the long-term.
“As the reforms take hold, consumer and services-based companies will become the new engines of growth from the traditional manufacturing and industrial companies, so by understanding how China is changing it is still possible to find value.” – Alex Wolf
He said growth based solely on fixed asset investments could not continue and eventually China would reach the point where investment levels were sufficient. He believes that time has come and along with a drop off in exports the Chinese economy is about to undergo more structural change.
“I am not optimistic about the GDP growth rate. China has already invested a lot and has just enough capacity, so there is no need for the country to invest the way it used to,” Suzuki said.
“There are also numbers that show the export penetration of China has essentially slowed down and that’s a dramatic change from the 1990s and 2000s.”
As China tries to move away from investment-led growth to consumption-led growth, the composition of that growth is more important than its slowness, according to Standard Life Investments Emerging Markets economist Alex Wolf.
He said that China’s investment share of GDP was very high at nearly 50 per cent and needed to come down to more sustainable levels while rising wages and falling productivity could see China lose its labour-intensive export competitiveness.
Interestingly, this will benefit both emerging markets outside of China as well as emerging market sectors inside China – answering the question that China is both emerging and developed in different areas.
“These factors (GDP size and labour competitiveness) will affect other emerging market countries in that China’s demand for commodities used in property and infrastructure investment will fall, as will its demand for processing imports as manufacturing moves to other low-cost countries,” Wolf said.
“However, the structural reforms taking place in China to liberalise the financial sector, reform state-owned enterprises, and decrease the state’s role in economic development will promote growth in new industries and thus China can still provide value as a source for emerging market investments.”
“As the reforms take hold, consumer and services-based companies will become the new engines of growth from the traditional manufacturing and industrial companies, so by understanding how China is changing it is still possible to find value.”
Read part two of Jason Spits’ report – Mixed fortunes emerge in under-the-radar markets.
