Shopping carts are seen at a supermarket in Beijing, April 16, 2014. China's economy grew at its slowest pace in 18 months at the start of 2014, but did a touch better than expected and showed some improvement in March, suggesting Beijing will not rush to follow up recent steps to support activity.Kim Kyung-Hoon/Reuters
A recent series of Chinese economic data will do little to help domestic resource investors, but there are also encouraging signs that the government plan to rebalance the economy towards consumer spending – one that would provide major investment opportunities – is gaining traction.
The Chinese economic data that is most heavily associated with Canadian resource stocks – gross domestic product growth, money supply, and industrial production – has all been reported below analyst expectations over the past few days. Fixed asset investment growth was reported at 17.6 per cent, the lowest level since 2002.
However, retail spending provided a bright spot with year-over-year growth exceeding expectations at 12.2 per cent.
Economists, led by University of Peking finance professor Michael Pettis, have long warned that China's investment led, infrastructure-heavy growth strategy was unsustainable. The problems that resulted from pursuing this path, including ghost cities and debt defaults, are increasingly apparent.
In a recent speech, Chinese Premier Li Keqiang reiterated the government's blueprint for economic reform. "We will create impetus by improving people's livelihood. The 1.3 billion Chinese represent the largest consumer market and source of demand in the world. We will improve the social safety net and make consumption provide greater support for economic development."
Wages and consumer spending are now growing faster than overall GDP. This is an important development. It means that over time, as in developed world economies, Chinese consumers will drive an increasingly larger share of the economy – which is exactly what the government plan is designed to accomplish.
It's early days, no doubt, but a continuation of the current trend would have major implications for Canadian investors. Declining emphasis on construction and infrastructure growth in the Chinese economy implies that commodity producers, many of which have dramatically expanded production in recent years, will be far less profitable.
The companies that will flourish are those benefitting from rising Chinese consumption. This includes domestic Chinese companies like staples provider Hengan International Limited, and global consumer goods companies like Adidas AG which receives significant revenues from the mainland.
Scott Barlow