A Chinese Fortune?

Why is the Chinese economy slowing?

China’s GDP growth has slowed from 9% per year to 7.5%. Their torrid growth has produced tycoons in real estate, manufacturing, and financial services. Indeed, many have suggested that there are bubbles in these economic sectors, and that China’s slowing growth may pop the bubble.

China’s average savings rate is around 50% of the economy—compared with around 5% in the US. This allows Chinese businesses to capitalize on profitable opportunities at the drop of a hat. But this can create over-capacity. Their steel industry is an example: China can now produce up to 900 million tons a year, while the most it needs right now is 625 million tons.

A high savings rate goes along with a high investment rate—and some of those investments are bound to be duds. Unless the central government loosens the reins and lets businesses make their own decisions, those mistakes will just get bigger and bigger. Only the free flow of capital and ideas can allow them to adapt and avoid colossal waste.

Douglas R. Tengdin, CFA

Chief Investment Officer

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