Finance

David Rosenberg: The Great China slowdown has wider implications than meets the eye

David Rosenberg: The Great China slowdown has wider implications than meets the eye

Key takeaways to help investors navigate the headwinds

Published Aug 21, 2023  •  Last updated 1 hour ago  •  3 minute read

A woman works in a textile factory in Haian city in China's eastern Jiangsu Province. China has seen a string of misses on economic data after coming out of one of the longest-standing COVID-19 clampdowns in the world.
A woman works in a textile factory in Haian city in China’s eastern Jiangsu Province. China has seen a string of misses on economic data after coming out of one of the longest-standing COVID-19 clampdowns in the world. STR/AFP via Getty Images

By David Rosenberg and Bhawana Chabra

China, a.k.a. “the growth engine of the world,” has posted a series of disappointing economic data points over the last few months.

The string of misses on retail sales, purchasing managers index, gross domestic product, exports, industrial production, etc., came in despite a low base being owed to one of the longest-standing COVID-19 restrictions in the world, which was finally lifted last year. Hence, not so surprisingly, all hopes were pinned on “revenge consumer spending,” as was seen everywhere else in the world.

Financial Post

THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLY

Subscribe now to read the latest news in your city and across Canada.

  • Exclusive articles by Kevin Carmichael, Victoria Wells, Jake Edmiston, Gabriel Friedman and others.
  • Daily content from Financial Times, the world’s leading global business publication.
  • Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
  • National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.
  • Daily puzzles, including the New York Times Crossword.

SUBSCRIBE TO UNLOCK MORE ARTICLES

Subscribe now to read the latest news in your city and across Canada.

  • Exclusive articles by Kevin Carmichael, Victoria Wells, Jake Edmiston, Gabriel Friedman and others.
  • Daily content from Financial Times, the world’s leading global business publication.
  • Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
  • National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.
  • Daily puzzles, including the New York Times Crossword.

REGISTER TO UNLOCK MORE ARTICLES

Create an account or sign in to continue with your reading experience.

  • Access articles from across Canada with one account.
  • Share your thoughts and join the conversation in the comments.
  • Enjoy additional articles per month.
  • Get email updates from your favourite authors.

But there have been headwinds: continued slowdown in property prices is making the Chinese consumers feel poorer, and urban youth unemployment — at a whopping high of 21.3 per cent even though overall unemployment remains stable at about 5.2 per cent — is adversely impacting consumption demand amongst the younger cohort.

Though this near-term weakness is prompted by China’s crackdown on the real estate and tech sectors, which has resulted in slower consumption, the country is also faced with a more structural “middle-income trap” as GDP per capita has risen, debt to GDP has almost tripled over the past three decades and the growth rates have come off.

Consequently, we believe the slowdown in the Chinese economy is not merely tactical, but is more complex and has wide-ranging implications than what primarily meets the eye. China’s extraordinary export-led growth has been driven by becoming a low-cost production powerhouse, but drivers for this kind of growth are waning.

Three China headwinds

Going forward, there are three headwinds that would keep the high growth trajectory capped.

Canada’s best source for investing news, analysis and insight.

By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails or any newsletter. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300

First, the high overall debt-to-GDP ratio (at 297 per cent, it has almost tripled over the past three decades) will keep the government’s capacity for fiscal stimulus limited, implying China cannot turn to the playbook it used during previous downturns such as the one seen in 2008 when it announced a massive stimulus package worth four trillion Chinese yuan (US$586 billion at that time).

Second, a shrinking and aging labour force (average age of the labour force is now 39 years versus 32 in 1990) has pushed wage costs higher. Consequently, southern neighbours in Asia seem to present more lucrative options for the production of low-cost goods (Thailand’s unit labour costs have risen only 43 per cent since the year 2000 while China’s have about tripled).

And public policy uncertainty has gone up drastically — especially in light of the trade war with the United States, the crackdown on tech, real estate and education tech sectors, and prolonged COVID-19 restrictions — prompting most corporates to diversify their supply chains away from China to the other emerging peers with better labour costs and policy support, culminating in corporate strategies more popularly known as “China plus one” or “friend-shoring.”

Takeaways for emerging market investors

This structural shift in China’s growth story has implications for emerging market investors. There are a few takeaways to navigate these contours.

While the country’s valuations are more amenable as it prices in these risks (the Shanghai composite 12-month forward P/E is at 10.1x), China will not be the secular story it once was, so investment decisions should be more bottom-up and sectoral in nature to avoid the “value traps.”

  1. A housing development in Bradford West Gwillimbury, Ont.

    Why immigration could be good for housing affordability

  2. People make their way near the New York Stock Exchange.

    My recession call has the haters out in force, but I’ve been here before

  3. A trader on the floor at the New York Stock Exchange.

    Bear market rallies are fun to rent, but not to own

Owing to supply-chain diversification away from China and policy support from the governments of emerging peers (such as production-linked incentives introduced by India’s government to support the manufacturing sector), emerging economies like India and Mexico will see more macro tailwinds (Mexico recently surpassed China in terms of exports of goods to the U.S.) and this concurs well with our positive call on India and Mexico, which we expect to do well over the next few years,

And, more tactically, the near-term slowdown could put downward pressure on commodity prices, thus implying a negative rub-off impact on Brazil and Australia.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Bhawana Chabra is a senior market strategist there. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

Read More

Аватар

Admin

About Author

Leave a comment

Ваш адрес email не будет опубликован. Обязательные поля помечены *

You may also like

Finance

Left4 Direct trade ihil adipisicin thundercats viral helvetica

Within spread beside the ouch sulky and this wonderfully and as the well and where supply much hyena so tolerantly
Finance

Left3 Excluding well some hummingbird meticulous

Within spread beside the ouch sulky and this wonderfully and as the well and where supply much hyena so tolerantly