OPINION: It is unwise to bet against China over the long term
Significantly lower Chinese growth needs to be weighed by investors as a risk event, but it is unwise to bet against China over the long term.
While South African equities are regaining some lost ground, all eyes are firmly set on the post-lockdown global economic revival. However, any prospects of an upturn remain intertwined with the unfolding Chinese and American power dynamic.
Asian newswires are aflutter with reports by the World Bank that some emerging economies in East Asia may be pushed into recession as a result of Chinese growth falling to around 2%, potentially creating a “third wave” event – on top of the trade war and Covid-19 – through which millions are pushed into poverty.
Director of Investments at Old Mutual Investment Group, Hywel George, agrees that significantly lower Chinese growth needs to be weighed by investors as a risk event, but says that it would be unwise to bet against China over the long term.
He says that investors should instead prepare for more geopolitical “noise” in the lead-up to the US presidential election in November, with moves to weaken the Renminbi set to become an increasing “flashpoint”. “We are beginning to see some positive signs as China gets back to 80% to 90% of previous economic activity. China has enormous resources, substantial political will and an ability to think strategically with a long-term view. However, it is currently in a risky phase,” says George.
China’s previous tailwinds of globalisation, the move to manufacturing and cheap manufactured goods have all turned into headwinds. “Other countries are looking at cheaper manufacturing bases and greater levels of localisation, which is adding pressure on China to quicken the pace of its consumer-led growth trajectory. The current Chinese recession is the first in 40 years and authorities are, therefore, expected to react with extensive stimulus until growth resumes,” says George.
The growth rate of 6% per annum for the past 30 years and the size of its population means China needs to secure more trade routes and access to commodities.
To meet its needs, China has embarked on an ambitious Belt and Road initiative to supply infrastructure and associated influence across ancient maritime and land-based trade routes (the old Silk Road). The target is 2049 for the completion of this enormous $8 trillion drive to stretch over two-thirds of the world’s population and to almost half of world GDP. “If it succeeds – and this could happen way before 2049 – China will again be the great world power,” says George.
In fact, China’s GDP in absolute terms could overtake the US’ in 2030 if it grows at 6% and the US’ grows at 2%. However, the flip side is that if China only grows at 4% (and the US at 2%), then it takes a decade longer, until 2040, for China to overtake the US.
“If China does not grow at north of 5%, then migration to cities slows and more people start to talk about a move to democracy. However, if the combination of a single-party state and capitalism can endure, then China can be a dominant power,” says George.
However, risks like higher debt servicing costs, the need for a weaker renminbi, urbanisation, an ageing population and the shift away from China to other countries, like Mexico and Vietnam, for cheaper manufacturing bases are mounting. Add to this Covid-19 and even lower global demand and China’s outlook suddenly looks less promising.
“Covid -19 could be the thing that undermines the great Chinese expansion project, but we will see this unfold over coming years, not weeks,” says George.
The US, meanwhile, is expected to attempt to resume more normal activity in May and June, together with much of the rest of the world.
“We have already seen a strong recovery in markets as market participants both price in significantly lower corporate profits in 2020 and look forward to a more normalised state of affairs in 2021. Nevertheless, there will be a lot more geopolitical noise into the second half of this year,” says George.