I am a long-term, business-focused investor who does not spend too much time on macroeconomics. Still, as a Sydney-based global manager, I would be remiss to not acknowledge the slowdown facing Australia’s most important trading partner, China.
The Middle Kingdom consumed 31% of Australia’s exports in 2018, according to the ABS, which is more than Australia’s next four largest trading partners combined, so I suggest Australian investors of all stripes sit up and pay attention as well.
China’s remarkably steady drumbeat of GDP growth has slowed to 6.0% year-on-year growth in the third quarter of 2019. While still an impressive mark for most countries, this is the slowest growth rate in this tightly managed number since the Chinese government began publishing quarterly GDP numbers in 1992. Also note that China is clamping down on capital flight– not something that typically happens when the local mood is positive.
A tailwind to China’s growth over the past decade has been its expanding balance sheet. The Institute of International Finance estimates that China’s total debt is now 303% of GDP, up from the mid-to-high 100%’s prior to the GFC. Not only has this debt made the economy less robust but the likely lack of a repeat expansion means the next decade of Chinese growth likely will look very different to the last.
Some investors are quick to point out that the internalised nature of much of China’s debt and the tight grip the Chinese government has over its economy should help the country navigate a crisis. Both are true to a point – but only to a point – and place considerable faith in bureaucrats who have relied very heavily on stimulation as a solution.
I’m not wholly bearish on China and wish the country well. I am wary about the current health of its economic model, though, and have less exposure to this much-touted economy than most would expect.
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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.
Hi Joe, If the country doubling its economy every 8-10 years (in real terms), wouldn't the so called slow growth of 6% equate to 15-18% of 1990 economy? Also how Chinese fare compared to Japan's high debt levels?
Hello Joe, Don't dispute your stats but I would argue that those in peril are those who are not (sensibly) engaging with China. I type this from a cafe in Yunnan watching huge groups of Chinese tourists swarming past. As you know the place is immense in every sense of the word. The whole country is a construction site. Many of the middle class are now flthy rich, and it's is about to become the worlds largest economy. It's now too big to fail. I say ignore the doomsayers and get involved. Jeff McInnis. PS. My local suburban Chinese supermarket has great Penfolds drops. Thanks TWE.
Awesome to get your comment from China Jeff!
Great article from Joe. The bubblieness of Jeff's comment is off the scale.
Hi Jeffrey and A. Ozaydin. Thanks for the comments. I appreciate the benefits of compounding and that there is much to be optimistic about in the long-term, however, I think underlying issue here is that China's current rate of growth is likely unsustainable. Practically speaking, the country can only continue to expand its balance sheet for so long. Note that China's current debt-to-GDP level of 303%, per the IIF, is comparable to where Japan's sat around (315%) around the time its economic tires went flat (2001). Another long-term headwind is demographics: The country's working-age population peaked in 2013, according to McKinsey. Or, for another angle, a piece for the Collaborative Fund by Morgan Housel notes the change in China's working-age population increased by 30.1% from 1990 to 2019, however, it is expected to decrease by 20.6% from 2019 to 2050. Ultimately, the combination of a limited ability to continue expanding the balance sheet, a shrinking working age-population, and pushback from countries who are weary of China's muscular trade policies all point towards future growth being materially lower than the past.