|12/5/2012 2:00:00 PM|
The Great Wall of worry
Brad BlackburnDue to my unique combination of writing talent and complete lack of courage, I've written many times about China, but have gracefully avoided offering any sort of opinion on the key question: Is China headed for a crash landing, continued strong growth, or something in between? This is an incredibly tough question, but it's also a vitally important one. If you can manage to make it through the following paragraphs, I promise to reward you with one small man's answer to the question.
China is the second largest economy in the world. Since the great recession, its growth has buoyed the global economy and has helped less developed countries all over the map keep their economies moving forward. If China can't continue to help the global economy limp along, we may see a significant hit to the markets in the future.
Over the last 35 years, according to The Economist, the Chinese economy has grown at 9.9 percent a year. However, over the last three years, its GDP has slowed significantly from a high of 13 percent to a still-worthy-of-envy 7.4 percent. If they can sustain even a 5 percent growth rate into the future, I'll be pleased. However, that will be a tall order.
It's a very well-accepted economic truth that the bigger you get, the slower you grow. That, in a nutshell, is China's major problem. Their fantastic growth was built by bringing very poor people into cities and making them somewhat less poor by putting them to work very cheaply in manufacturing plants (also known as: "Made in China"). This was wildly successful, and created a growing middle class. As China's middle class grew, wages grew as well. But wait, wasn't it those incredibly low wages that helped China be so competitive in the first place? Now that its competitive edge is waning, China's manufacturing base has been moving to countries with even lower wages (sound familiar?). For this reason, China realizes it must transform its economy away from exports.
In an ideal world, the enormous population of China would suddenly turn into massive spending, credit card happy, expensive-stuff-loving, consuming machines like we are here in America. However, they have a very, very long way to go. Currently, consumer spending accounts for roughly one third of China's GDP. Contrast that with a whopping two thirds of GDP here in America. If you combine China's slowing manufacturing and exports with its lackluster consumerism, you get a big problem. Where will their future economic growth come from?
As of now, the answer is that they are going to throw money around at a rate even Obama would blush at (cheap political joke alert). According to Morningstar, China has increased its spending on things like skyscrapers and stadiums 233 percent over the last 10 years. Further, they are building residential housing space twice as quickly as they were just 6 years ago. All over the country they are building roads, railroads, bridges, schools, hospitals and more. All this has caused investment to become an increasingly large part of China's GDP. The key to their fortunes might just be whether that money is being invested wisely or thrown around to government cronies. If the global economy is counting on the Chinese government to invest wisely, we may all be very disappointed. However, before you get too stressed, let me give you the positive side of things.
Let's go back to the startling GDP drop over the last three years. Much of that drop was due to deliberate decisions made by the Chinese to slow their over-heated economy. That's right -- they did that on purpose. Further, the Chinese seem to be having success at increasing their consumer spending. Their retail sales are up 14 percent so far this year. According to The Economist, consumer spending has accounted for 55 percent of their GDP growth this year. That looks a lot like progress to me.
However, even if you accept that Chinese consumers are beginning to step up, that won't be nearly enough in the coming years. So let's take a closer look at all that government investment. China is a very large country that by most accounts is still woefully underdeveloped. That means that they may not have to be all that wise to find worthwhile places to make investments. However, even if China is simply throwing money around haphazardly, they have the money to do that. For our US Government "stimulus," we had to borrow money from China (and others); however, China doesn't have that problem. They are a net exporter of money. In fact, according to The Economist, China saved 51 percent of its GDP in 2011. Given that, a few "bridges to nowhere" aren't nearly so damaging.
The last point I'll make is that China still has all sorts of cards to play. In addition to gobs of cash, their key interest rate is still at 6 percent. Here in America, our interest rates are so low that the Fed has been forced to resort to gimmicky things like "Operation Twist" and "Quantitative Easing."
All this leads me to my conclusion: China isn't likely to crash anytime soon. However, that's not the same thing as rampant growth. If their main source of growth is government investment, their glory days are numbered. But I don't think the end is near yet. If I'm correct, China will continue to be a somewhat positive force for the global economy into the foreseeable future.
Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at firstname.lastname@example.org
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