We have all become used to the idea that China has become the engine that powers the world’s economy. In the past 30 years, it has developed a monied class with a taste for everything from consumer electronics to Rolls-Royces, an advanced manufacturing base and an economy set to outpace that of the US.
But now, China has just posted its slowest economic growth since 1990.
The figures can lie – but not forever
China’s fourth quarter GDP figures suggest that annual growth was 6.4%. It is a figure that most of us in the west would envy, but it is China’s lowest for nearly 30 years.
Chinese economic statistics are always a little suspect, and national prestige has in the past come before absolute accuracy. But if anything, the fact that the Chinese Government is being upfront about this slowdown demonstrates its seriousness. Some analysts put the growth in Chinese GDP as low as 5.3%.
Some facts can’t be airbrushed to look more attractive. Iron ore imports fell in 2018, for the first time since 2010, suggesting that industry is feeling the pinch of reduced demand for transport and infrastructure. Domestic car sales are down for the first time in nearly 30 years. This might show that middle class consumers, who have become a powerful force in driving the Chinese economy are also worried.
What’s going wrong?
But it’s not a crisis of confidence, and it’s certainly not a shortage of manpower that is causing China’s economic woes. China began the transformation from a dated party-led agricultural economy into a manufacturing powerhouse with a policy of low wages and by blatantly copying intellectual property from foreign rivals.
This was supported by enthusiastic lending, which supported investment in technology and production facilities. The growth of the private sector, supressed under Mao, was also encouraged.
As we have seen it worked very well, with companies like Apple transferring their manufacturing to Chinese factories. But although it has helped transform China into a credible threat to US global dominance, it was not sustainable. However hard you run to catch up with the rest of the world, you must stop when you reach it.
Now, 30% of the workforce is university educated. While a better skilled work force will contribute to growth, it means the cheap labour that was the basis of China’s economic miracle is no more.
What happens now?
As it is now the largest exporter in the world, China’s exports can no longer grow much faster than the global economy.
A slowdown in growth therefore looks inevitable. But what will this mean for the rest of the world?
A slowdown in exports to China would be bad for many countries. In countries dependent on commodity exports, like Australia, Brazil, and Indonesia, a prolonged slowdown could have a negative impact on GDP.
However, a fall in commodity prices could be beneficial, for other countries that consume the commodities, such as the United States and the countries of Europe.
More worrying is the fact that firms round the world depend on sales to China. A prolonged slowdown would affect the rest of Asia, which could in turn depress the global economy.
What should you do?
It could be time to look at your portfolio, and to consider its exposure to the Asian sector in general. It is likely that the trade war will be over without too many shots being fired – it is harmful to both sides – but the economic miracle of China looks to be a little less miraculous in future.
For some advice on investing for an uncertain world, call the experts at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
bbc.co.uk – China’s economic slowdown explained – 29th January 2019
asia.nikkei.com – Asia’s economy deemed to be swayed by China slowdown in 2019 – 2nd January 2019