For years now, investors have been fretting over the expected slowdown in Chinese growth. After all, the 7.5% the country was recently enjoying just cannot go on forever, and the only real question was over the severity of the slowdown. The more bearish observers were expecting a hard crash, with those more optimistic looking for a so-called soft landing and the reality looks like itll be somewhere in between.
We heard this week that Septembers factory activity figures suggested the biggest contraction in more than six years although thats actually less dramatic than it sounds, as any fall after years of expansion is inevitably going to be the worst for however long its been.
Slowing growth
The Chinese government had been aiming for 7% growth this year, but the Asian Development bank has lowered its estimates to 6.8% and Western central banks are resisting interest rate rises as ripples from China are expected to impact on the whole worlds economic outlook. But again, a bit of perspective is needed growth of only 6.8% is still beyond the wildest of dreams of most of us.
If Chinas stock market is anything to go by, we really are in trouble, as it has lost 45% of its value since June. But again, thats nowhere near as bad as it sounds, for two main reasons. Firstly, listed companies account for far less of Chinas GDP than in Western nations. And secondly, it was a politically manipulated stock market and had been pumped to unsustainable levels its almost as if they didnt learn anything from that Great Leap Forward trick they tried all those years ago.
Structural change
Im less worried about China than many, yet Im convinced there is worse to come before things get better. The real problem is that China is trying to move away from massive state-owned enterprises that drive growth, to a freer market of private enterprise but at the same time, the Party still wants to control everything and wont let go and leave it to market forces.
State enterprises are horribly inefficient compared to private business, as just about anyone with any experience of the world in the past century would expect. In fact, returns from some of them arent even enough to cover their cost of capital, but the banks are obliged to keep rolling over their loans and arent allowed to pull the plug.
And so the banks are building up toxic debt, and if Chinas economy were to be fully opened and free tomorrow, a string of collapses of state enterprises could precipitate a financial crisis that would dwarf the one weve just experienced here in the West.
The market will win
Of course, that wont be allowed to happen, but structural change is going to be harder than feared and it will need to be managed carefully and delicacy is not a characteristic weve come to expect from the Beijing political elite.
But Chinas greatest strength is the Chinese people, who have achieved so much this far that theres no going back. The free market will win out, and long-term investors should have no fear in buying shares in our best FTSE-listed businesses but the short-term path could be strewn with a few more rocks than many expect.
In fact, the current China-led slump suggests that now is the perfect time to be buying shares if you want to achieve millionaire status before you retire.
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