In news last week, we heard much on China’s slowdown in growth. With over 40% of all the world’s growth coming from China in recent years, this is no small matter for equity investors.
I am of the mind that this 2012 slowdown is the back end of the stimulus put in place back in 2009. Three years later, there is a needed period of slow growth to cool down prices. This puts in place a more stable market framework for expansion. That puts me in the cyclical camp.
To my mind, there are two large camps of opinion on what slowed down China.
Opinions fall squarely into two buckets.
means the slowdown is coming from something unbalanced inside the China system. It is a diffuse build-up of long-term problems to deal with. Cyclical
means China’s monetary and fiscal authorities restricted demand and spending. A Cyclical slowdown means the Chinese economy’s demand will ebb-and-flow solely a result of these actions.
China's CYCLICAL slowdown ended in July, when the People’s Bank of China began to cut its interest rates. The tightening worked well to extinguish speculation that drove house prices higher. In this story, housing has bottomed and auto sales – 40% of China’s consumer spending – should pick up. Housing prices have come down 10 to 15 percent from the highs. And wage growth at 10 to 20 percent a year over this period means affordability can be up 30 to 50 percent now.
The SECULAR slowdown camp sees slow growth caused by a huge lack of reform. China’s entrepreneurs are crushed by special interests, entrenched state owned enterprise (SOEs), and a rising wealth divide. This created social unrest (there are many unreported walkouts and strikes) and political risks. This camp believe China’s social issues are behind the slowdown. They also believe a secular slowdown could soon be caused by China’s one child only demographic time bomb
In some structural stories, Chinese exports are still very competitive. But there are numerous reports of heavy industrial and raw material overcapacity. So China needs to move up the value chain. China policymakers need to use this cycle to push through the painful process of moving up the value chain.
So what is the dominant force behind the China slowdown?
Is it cyclical? Are we about to see China surge forward on a wave of consumer spending in autos and housing and other consumer discretionary goods?
Or is it structural? Is there a need for deep structural reforms to kick-start the Chinese economy? Do policymakers -- new policymakers that come in January -- need to do much more serious work before the previous high level of growth resumes?
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