- Concerns that China is a bubble that's about to burst are unjustified.
- While further monetary tightening is likely in China, we don't anticipate a bust any time soon and continue to expect Chinese GDP growth of around 10% this year.
- This is positive for the commodity price outlook.
Making the right call on China is now critically important in terms of the investment outlook. However, while there is always a lot of scepticism regarding China, it seems that the 'China is a bubble about to burst' camp has grown in number, or at least become more vocal. The principle arguments are that China has overinvested, its export potential is exhausted, its assets are in a bubble, bank lending has been excessive and, as stimulus is removed in response to inflation, its growth will collapse. While such a scenario cannot be ruled out, it is unlikely. This article looks at why a collapse in China any time soon is doubtful.
Has China overinvested?
Investment in China is now 40-50% of GDP, which is well above comparisons to other countries and there is no doubt it won't continue at this pace. Yes, there are pockets of excess. However, there is nothing to suggest that China has overinvested on a national basis.
- China is still a poor country, with per capita GDP of just over $US3,000, compared to $US46,000 in the US and $US40,000 in Japan. It still has a lot of catching up to do and it needs investment to do so.
- The recent surge in investment in China has not been in factories, but rather in infrastructure. It still has a fraction of the railway length the US had a similar stage in its development 100 years ago. It also suffers from significant transport bottlenecks. This has all sorts of implications, such as forcing it to become a coal importer, despite having significant coal reserves of its own.
- The surge in investment in recent years has not been in the coastal provinces, but rather in inland provinces where the shortage of productive capital, including transport infrastructure, is most intense.
- The stock of productive capital per person is about 5-10% of what it is in the US and other advanced countries, so there is a long way to go before it can be claimed that China is overinvested.
- Despite claims to the contrary, there is little evidence investment in China is seeing a lower return in terms of GDP growth than has been the case in the past.
What about China's reliance on exports?
A common concern is that, with China's wages on the rise and consumer demand in the US, Europe and Japan likely to be subdued, China's export boom is over. However, we think this concern is overblown for several reasons.
- The importance of exports has been exaggerated. Thanks to strong import growth, net exports only accounted for 1.2 percentage points of China's average 11% GDP growth rate over 2000 to 2007 (that's just 10%).
- China has diversified its export destinations - 10 years ago 49% of China's exports went to North America, Europe and Japan, now only 38% do.
- China is doing a lot to encourage consumer spending, including boosting social welfare to reduce precautionary saving. China currently has just about the world's fastest rate of growth in consumer spending.
- Chinese wages are still very low, particularly in the largely untapped central and western provinces.
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