DIY Investor Magazine
/
2015 Issue
31
In many ways, China has been the economic
success story of the past decade or two. It has
provided some of the great growth opportunities of
recent years and investors were glad of that when
this mighty economy dragged the world out of
the credit crunch. But the numbers do not look so
strong as we head into 2015 and that is worrying
many who have bought into this mighty economy
in the past.
Perhaps the biggest change in portfolios since
the turn of this century is that today most investors
consider there is a need for global exposure to
be truly diversified. Those who have ignored the
world outside these shores will have missed out on
some of the big growth stories of our time. Allied
with this demand has been the opportunity for
DIY investors to achieve that exposure, simply and
cheaply, using managed collective funds or index
tracking Exchange Traded Products (ETPs).
And so exposure to China is now a staple in
a large number of portfolios. Investors have
benefited from three decades of double digit
growth which peaked at a staggering 14% in
2007. It means that today China is the second
biggest national economy in the world, worth
some $12 trillion. It is recognized as the world’s
manufacturing workshop and has a burgeoning
middle class demanding luxury products from the
West. But has the shine started to wear off mighty
China? After all, growth has slowed, car sales
growth has halved, producer price inflation has
fallen, exacerbated by the weak oil price posing
deflationary risks, there is scepticism over official
figures and this has all been reflected in some
equity weakness.
Investors do need to be wary of signs of economic
weakness. Perhaps, though, we need to put these
numbers into perspective. Yes, growth has fallen
but it remains around 6-7% per year. That is not
only the envy of developed nations closer to home
but remember, today, the Chinese economy is
double the size that it was when growth peaked
eight years ago; in cash terms GDP growth is
comparable. Similarly while the slide in car sales
growth will concern high end European and
Japanese manufacturers, it has fallen from a
SHOULD WE WORRY
ABOUT CHINA IN 2015?
staggering 13.9% per year to a still considerable
6.9%. And while deflation should always concern
investors, Chinese authorities can comfortably
draw on a huge $4 trillion in foreign currency
reserves to address the problem.
This is something to keep an eye on.
It is some of the longer-term structural changes
that invite questioning. One such trend is
towards de-industrialisation; a fate known well
to the developed economies of Europe and the
United States. That is the shift in the economy
from manufacturing to services. Here the decline
in Chinese manufacturing employment actually
got underway in the mid-1990s when it peaked
at (a not very high) 15%. And China has turned
to services while income levels are less than
a third, in relative terms, of those experienced
when Western economies de-industrialised.
As most Chinese workers moving from rural
areas to the cities are today finding work in
services rather than making things, there are
reasons to believe the slowdown in output could
be a permanent feature. After all, rapid growth
where it has been found around the world and
throughout history has usually been associated
with the industrialisation stage of economic
development. Something else to watch.
The Chinese story does not look quite so
compelling for investors as 2015 gets underway.
The economy is set to endure a challenging year
with questions on the longer-term horizon which
present risks to the health of portfolios. That
said, China continues to produce some attractive
growth stories and it is difficult to ignore, let
alone write-off, the world’s second biggest
national economy.
IT IS RECOGNIZED AS THE WORLD’S
MANUFACTURING WORKSHOP AND HAS A
BURGEONING MIDDLE CLASS DEMANDING LUXURY
PRODUCTS FROM THEWEST. BUT HAS THE SHINE
STARTED TO WEAR OFF MIGHTY CHINA
