As China’s economy struggles this year, many investors are content that the country’s rate of expansion is below the government’s official target of 5%. This is reflected in the significant poor performance of the Chinese stock market compared to that of the US. and other global peers over the past 4 months. In August, foreign investors sold Chinese inventories at a record pace, according to the Financial Times.
Lately there is a diversity of consistent perspectives on the Chinese economy. Until recently, top forecasters predicted that China could have an expansion of only 5% this decade. However, the International Monetary Fund now estimates that China’s gross domestic product expansion will be less than 4%. in the coming years. The Lowy Institute, an Australia-based think tank that conducts studies on the Asia-Pacific region, gives a more pessimistic forecast: it projects that the expansion will slow to 3% through 2030 and average 2-3% year-on-year over the next two years. Decades.
This raises the question of how China can achieve its stated 5% target. It is widely believed that the country’s population is peaking and is on the verge of decline due to the long-standing one-child policy. The main driving force behind the expansion has been the country’s higher rate of capital formation, supported by a top savings rate. However, returns to capital have fallen due to diminishing returns, and overall economic power, measured through the overall expansion of the productivity of things, has shrunk by about a share over the past year. beyond the decade. Therefore, economic power would have to contribute especially to achieving the stated objective.
Many economists believe this will be possible. China’s economic policies under President Xi Jinping have favored inefficient state-owned enterprises at the expense of the personal sector, which is the country’s main source of innovation and dynamism. There has also been an overrun of public infrastructure in many regions, and the real estate sector is now under serious pressure after decades of excessive construction that will take years to resolve. Meanwhile, the government is unable to expand spending due to China’s high debt ratio, which amounts to 300% of GDP, Nikkei reported.
Mickey Levy of Berenberg Capital Markets said in a Wall Street Journal op-ed that it would be prudent for Chinese leaders to recognize such demanding situations and set a more realistic medium-term expansion target of 2 to 3 percent. It would require significant fiscal stimulus and government investment in unproductive activities that would primarily serve to diminish potential long-term expansion,” he wrote.
If so, investors will want to think about the consequences of roughly halving China’s trend rate of expansion. The potential effects on the global economy do not deserve to be ignored, given that China and the United States have been the main drivers of global expansion since China became a member of the World Trade Organization in December 2001. JPMorgan estimates that China’s contribution to global expansion has doubled from 15% to 20% in the first decade of this century, to more than 30% now. decade.
Below are the main spaces that are likely to be affected by a sustained Chinese slowdown:
First, the most affected countries are emerging economies that produce raw materials and raw fabrics, as China is the largest importer of these products. This is already being felt in emerging-market stocks, which in August posted their worst monthly returns since 2015, Bloomberg As China reduces its reliance on real estate, which absorbs tons of iron ore from Brazil and Australia, it is also very likely to play a minor role in the global business cycle.
Second, the region that suffers the greatest direct impact is Asia-Pacific, as it is most strongly integrated with China. Therefore, you may experience a slowdown in your growth. However, several compensatory measures will help some countries in the long run. The first is that multinational corporations have diversified their home chains outside of China due to the Covid-19 pandemic and rising tensions between the United States and China. Among the main beneficiaries are India, Japan and Vietnam, which have been successful. to attract gigantic flows of foreign direct investment.
Third, industrial flows between the United States and China, which have already been affected by frictions between the two countries, could decline further. This could have an effect on U. S. economic growth. However, if China’s crisis were to continue A recent article by Paul Krugman of the New York Times noted that the United States has “remarkably little monetary or industrial exposure to China’s problems. “Another possible payoff is that deflationary pressures in China could simply help control inflation in the United States and other industrialized countries, and thus aid lowers interest rates.
One question raised by some observers is whether China will have a lost decade, to Japan’s delight, after its housing and stock market bubbles burst.
In my opinion, while there are some parallels between the two countries, there are also several key differences. The first is that the magnitude of the fall in asset values in China is likely to be less severe than in Japan, which has seen a cumulative drop of around 70%. The political reaction is also very different: China is targeting the market while the Bank of Japan has tightened its financial policy in an effort to burst the bubble. In addition, China’s banking formula is usually state-owned, meaning it is less threatened than Japan’s at the time.
Given those considerations, the likely end result is that China’s economic slowdown will be less abrupt than Japan’s. But it will also take a long time for the excesses created to be resolved.
At the same time, a policy brief by Bruegel – a Belgian think tank – notes that the average return on assets of Chinese corporations has declined, for both private and state-owned companies, since the mid-2010s. So, while the Chinese might seem reasonable with a low price-earnings ratio, it may also lag behind its global peers for some time because investors haven’t priced in a sustained economic slowdown. In those circumstances, global investors may also consistently underweight Chinese stocks relative to their benchmarks, just as they did Japanese stocks during the time the bubble burst.