“Beware the sleeping dragon. For when she awakes the Earth will shake.”
China has become one of the most dominant economies in the world since 2000. Growth has been dramatic and they have created an economic environment where billions of people are now living a middle class life that otherwise would not have. They have nearly single-handedly destroyed the manufacturing sector in North America, as they product quality goods at very low prices. Labour is so cheap that many companies made a strategic decision to go there. This is one of the failures of a market system, as corporations’ primary goal is to be profitable at all costs. In the case of manufacturers, it has meant the loss of industries in Canada and the US. China has awoken and the world is feeling it.
China’s economic growth as measured by GDP has consistently been between 9% and 12%, except during the financial crisis in 2007-09 where there growth went as low as 6.1%. Their economy is currently softening to about an 7% growth level and the next number of months will be important as to if they will have a soft economic landing or a hard one. China has been the growth story of the century. The key now will be to manage a downturn in other key trading partners, namely the Euro zone and the USA. A major correction in world markets can reverberate worldwide. The US and Europe import a significant amount of goods from China. If they move into a deep recession, the impact on China will be significant. Not only a slowing of exports but a challenge to other areas of their economy. About 45% of their growth is due to business investment through the building of factories and manufacturing facilities. If exports decline, business investment will shrink dramatically. Also, bank loans which have been very loose will tighten as write-offs will increase at a rapid pace. On top of that consumer spending will be impacted as wage increases will be slowed and employment overall will be negatively impacted.
Can China Keep Driving The World Economic Growth Model?
First a look at the Shanghai Composite Index:
The market has seen two huge rallies – one in 2007 and the other in 2015. As you can see the first rally was dramatic as the market rose by about 300% in about a year. That was one wild move. The second run started in 2014 and finished mid-2015, also running for about a year. It ran up by about 150%, half of the run 8 years prior. If you invest in the Chinese market, you have to have exit strategies, as volatility is the major theme. Right now we are in a downtrend, so this is not a market to look at if you are an investor. We like the fundamentals long-term for China but today, things are rocky.
China’s debt load has reached a record high and their economy is slowing as you will see below. Their debt to GDP has risen to 237%, up from 148% at the end of 2007. That is a massive increase in debt for a country that is slowing rapidly. Restructuring will be critical moving forward, so the near future does not look that positive. But beyond the massive fiscal and monetary restructuring that will take place, China will most probably be a great place to invest…in time, potentially years away.
Now let’s have a look at their economy today:
Canada | USA | Europe | China | Japan | Emerging Markets