China's New Dawn

 

Yesterday at the official opening of Chinas annual parliamentary meeting, Premier Li Keqiang signalled that the lowest rate of growth in a quarter of a century is the "new normal" for the world's second largest economy. 

 


Last year China targeted a growth rate of 7.5% in GDP which it failed to meet. This in itself was a reduction from previous targets of 10% and well behind the years of almost 20% annual GDP growth. It now seems that gravity is catching the Chinese economy and forcing it to look at lower longer term growth.

This is not the first time this has happened in economic history. Many nations like Malaysia and Brazil managed to achieve long term double digit economic growth only to fall into what is known as the Middle Income Trap. Indeed, in history, only a few developing economies have ever managed to become advanced industrial economies. The Chinese leadership is now worried China will follow nations like Brazil and fail to break into the top level economies of the OECD.

Perhaps the biggest issue for international investors of China’s slowdown is its effect on the rest of the Asia region. To maintain high levels of growth after 2008 the Chinese government embarked on a massive spending program. Since 2008 The Chinese people and its government have created around $16 trillion dollars of debt. To put that into comparisons that is around the same size as the entire US financial system.

The effect of this extra spending boosted demand for raw materials, especially from Australia. In addition, money flowing out of China has boosted property prices right across Asia. Demand from China also helped sustain a number of Asian economies such as Singapore, Malaysia and Thailand.

As China slows it is likely to have a severe impact on Asian economies and currencies. In 2015 we should expect to see the Malaysian Ringgit and Australian dollar move much lower.  The Singapore dollar has held up for now but that too is soon likely to fall. Property prices in most parts of Asia and Australia are also likely to fall significantly.

To avoid any negative consequences it is likely to be better, for the time being at least, to look at US and UK assets. Both economies are doing well and both economies rely principally on internal consumer demand to support their GDP. As the Eurozone begins its QE program the Pound is likely to see a significant rise as Euro investors seek higher yields from within the EU.

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