Q: I've been reading reports that China's GDP growth is slowing. It feels that China has been the main source of global growth in recent years, so what does this mean for my investments?
A: Guy says:
Within the past week, the Chinese government has announced that GDP growth is the lowest it has been for a long time. A figure of 6.6 per cent may seem like booming to people in developed economies, but it is a big fall from the heady days of 10 per cent plus growth China enjoyed before.
As countries get more developed, it is normal to expect them to have reducing growth rates. The projects that yielded the best returns have already been done and wages are catching up, giving them less of an advantage.
You are right to say that China is very important for global economic growth. In 2018 the country was responsible for 27 per cent of the world's growth and contributed a little more than the United States.
The reason that a slowing is important is because global growth is the key determinant of long term stock market returns.
The relationship in the short term is confused, and stock markets can go up when economies shrink and vice versa, but in the long run it is growth that makes you money from shares.
China's problems even worse than the official figures state For this reason, I agree that China slowing is bad for the stock market and the decline of sustainable Chinese growth is probably even worse than the official numbers state.
When we think about GDP, we imagine it means the size of the economy or the wealth of a nation. The higher GDP, the more income and wealth a country has.
In Western countries this is broadly true and the quibbles with GDP are not that significant.
China, however, is another kettle of fish. GDP there is the result of government policies, not the actions of independent decisions made because those people expect profit.
The central government will set a target for the year for investment and expenditure and the major economic players will ensure they hit that. All of this is facilitated by debt raised by the Government, or with their support.
GDP is, in effect, the result of these policies. This means that it is possible for the government to hit almost any GDP number they like.
For this reason, we should all be sceptical of a GDP number from China and it isn't right to think of it as creating wealth in the way we think of it in the UK.
Why this matters If China is building “bridges to nowhere” or airports no one will use to pump up their GDP, it still means purchases of equipment and the employment of people who consume goods. What difference does it make to us if China wastes its money if the world gets the extra demand?
The key point is sustainability. Growth built on sound profit- seeking motives can sustain itself indefinitely. One built from spending that can never be repaid will eventually run out of money.
This is the fear I have with China – and I think over the next decade it is going to surprise people on the downside as the problems with bad debt there rear up.
I imagine many people reading this will be asking – so what? Does this mean my investments will fall or not? I wouldn't go as far to say it means your investments will fall, but it is a headwind and contributes to the overall slowing of global growth.
Despite the recent mismanagement of China's growth there is a lot of potential for their economy to continue to expand and other countries like India and many parts of Africa are picking up steam to compensate.
I suspect we will have a rocky year or two while the world adjusts but in the long term overall growth, and therefore stock market returns, will be attractive.