Importantly, much of China’s slowdown has been coordinated by policy. Many
starry-eyed China watchers predicted real GDP growth of 10%-plus
indefinitely. But there are limits to linear thinking. While trends can
stay in place for some time, lines often bend, or even break and gallop off
in unexpected directions.
China’s new path is driven by broad recognition that the growth model of
the last 30 years is neither balanced nor sustainable. The new model must
rebalance away from export and investment-led production toward private
consumption. “Made in China” and Western consumerism can no longer be
intimately linked. This is a necessary shift if China is to avoid the
so-called middle-income trap, which ensnares most emerging economies that
rely on cheap labor for growth.
GDP per head in China is now approaching US$$10,000. To move beyond this
level, policymakers know productivity must dramatically improve. That
requires a litany of change – reduced corruption, middle class rights, and
an improved operating environment for the private sector. A critical next
step is to establish a robust social safety net and thereby reduce
fear-driven high household savings rates. This will lead to a virtuous
cycle of consumption, job growth, and ultimately, higher real wages and
China is also moving from the rapid industrialization-stage of growth
(where the main objective was to build up infrastructure and heavy
industry) to the resource efficiency stage (where the main goal is to
maximize the return on investment). Therefore, over the next several years
China will see slower but better growth – due to reduced capital waste and
Investors naturally worry whether equity prices can keep rising even as the
economy keeps slowing. This is the wrong question. Headline GDP should not
be the focus. In fact, GDP growth tends to be negatively correlated with
equity markets (most likely because investors overpay for headline growth).
The most important facts about China today are not the problems of slowing
growth and high leverage. Rather they are the shift away from exports and
capital spending to consumer-led growth, improving margins, and financial
The makeup of China’s stock market is also rapidly changing. January 2017
saw the most IPOs of any month in the market’s history. The upshot is that
the Chinese stock market will come to more closely resemble the underlying
economy as a whole, rather than being dominated by state-owned enterprises.
Now is the time to be investing in an unloved sector. As China makes
progress in face of the many naysayers , equities have much room to be
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow on Twitter at
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