Growth in China has recently delighted on the upside, explaining the ebullience on the Shanghai stock market, with its advance of more than 7 per cent so far this year.
Can the good times last? Skepticism about China abounds, and a lot of the smart money has been predicting that the fast growing country will have a hard landing, pulling down resource dependent economies like those of Canada and Australia.
But here are four reasons Chinese growth may be better than expected -- from an unlikely source: Ian Russell, president of the Investment Industry Association of Canada. Mr. Russell took some notes from the recent Asian Financial Forum in Hong Kong, where he says delegates “were probably surprised” by the many presentations “pointing to an optimistic near-term outlook.”
Reason 1: Fears that China’s export sector will sputter due to a loss of competitiveness and rising labour costs are overblown. Sure, some lower paying work may migrate to poorer countries in Asia, but China is starting to move into more profitable, higher value-added manufacturing that requires skilled and more pricey labour.
Reason 2: A growing middle class numbering 300 to 400 million people will trigger substantial consumer and investment spending. A knock against China has always been that its economy is overly dependent on exports and investment. But China is changing quickly and growth is about to be boosted by the needs of its increasingly wealthy middle class.
Reason 3: China tightened the monetary spigots because of worries about inflation. But prices seem to be under control and the housing market has cooled. Residential construction could come roaring back to its traditional 40 per cent share of fixed investment from the currently depressed 35 per cent. This would add several percentage points to growth.
Reason 4: The government will boost stimulus spending should it be needed. Those fearful of a hard landing have to keep in mind that the government has shown itself to be adept at intervening at key points to keep growth buoyant. That is unlikely to change any time soon.
Higher Chinese growth would be welcome news for Canadian investors. The TSX only is only up 2.4 per cent over the last 12 months, with a great deal of the poor performance due to weakness in resource producers. A poster child for the effect is coal and metal miner Teck Resources. Early last year, it traded for more than $40 a share. It’s now is scraping along at $33.
A faster pace of economic activity in China would undoubtedly put a stronger bid into the markets for oil, coal, iron ore and other natural resources, although it would probably require a stronger recovery in Europe to really set the stage for a commodity based rally in Canada.