For around a year or so I have gradually become more cautious about the outlook for the Chinese economy despite the assurances from mining company executives, the RBA and Wayne Swan amongst others that all is well. Without doubt the rapid development of the major cities in China has been nothing short of spectacular but surely we must ask ourselves: is this rapid growth sustainable over the long term?
Many people will answer this question with a resounding yes and point out that China has around a billion plus people all keen to have a better life and willing to work hard to move up the income ladder. But the desire of a nation’s population to have a better life does not in itself result in economic growth and riches for all.
I know this sounds simplistically obvious, but of you read a lot of bullish outlooks regarding the Chinese economy they basically fall-back time and time again on the belief that the Chinese middle class will just keep expanding and spending therefore the growth will be there year after year.
We know that GDP growth in China has been very strong now for two decades averaging around 9% per annum since the early 1990’s. We can see from the vast amounts of commodities they import from Australia that there obviously has been a lot of economic activity going on during this period and a quick look at the new office towers in many major Chinese cities provides us with a visual insight into the modernisation of the nation.
But that has all happened in the past.
Most investment products include this warning in their literature or prospectus: Past performance is no guarantee of future results. But when it comes to China many analysts and market commentators seem to think that statement does not apply to the China investment scene and will brush aside any concerns about the Chinese economy as they they don’t exist.
But rather than brush aside those concerns I feel it is best for investors to be aware of them and take them into account when making investment decisions especially for those investing in the Australian stock market.
Remember the ASX All Ordinaries and S&P/ASX 200 are both heavily influenced by commodities related stocks and therefore any slowdown in China would most likely send their shares heading lower thus dragging down the overall Australian stock market.
One of the most prominent investors who is bearish on China is James Chanos who is president and founder of Kynikos Associates, an investment firm in the US that specialises in short selling.
In numerous interviews over the last year Chanos has been stating that his company is taking short positions related to stocks exposed to such areas as the construction and banking in China.
He has pointed out for example that fixed assent investment in China is running at incredibly high levels (i.e around 60% or more of GDP now) and that much of the construction related activity in China seems to be driven by the need to make annual GDP targets rather than based on any market requirement as such.
Certainly I saw a lot during my recent trip to Nanjing that makes me inclined to agree with Chanos more than say with Jim Rogers who is bullish about the Chinese economy.
Late in 2010 Chanos appeared on CNBC and discussed why be believed the Chinese property market was in a bubble and I have posted this interview below. In this interview he raises a lot valid concerns about the Chinese economy which simply don’t get much air in Australia.
James Chanos comments and observations simply reinforce my view that any slowdown in the Chinese economy will result in a major shock to the Australian economy. I think the reliance our economic policy makers have placed on an extended commodities boom is akin to paying poker with the Australian economy.
If the Chinese property sector was unable to be cooled gradually then a rapid decline in prices and construction activity would slash the demand for commodities like iron ore and copper.
This would most likely drag down Australian GDP growth and put further pressure on the Australian housing market. Perhaps the Australian economy could withstand a sharp fall in commodity prices, but I doubt it would hold up well if the residential property market also started to slide backwards.
I guess at this point in time there are two paths to follow. One is to believe in the seemingly unstoppable Chinese economy and ride the commodities boom to riches (or ruin). The other is to seriously think about preparing for a scenario where the Chinese economic miracle comes to an end in the not too distant future.
I am on the second path and am preparing as best I can for a economic slowdown in China.
Finally let me just remind readers than I am not in the business of providing financial or investment advice. The purpose of this blog is simply to toss up some ideas and analysis for discussion purposes. So as always please feel free to leave a comment and shares your views.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp