China’s economy is changing. What does this mean?
The Chinese economy has been—if not the locomotive—the coal-car of the freight train that is the global economy. China is in the process of rebalancing its economy, putting less emphasis on exports and more emphasis on domestic consumption. But to do this they need to strengthen their social institutions, encouraging their people to save less and spend more.
Such an approach is risky. If growth slows suddenly, it would be highly destabilizing. But it’s not like the Chinese have much choice. Investment spending is about 45% of their economy. Overcapacity will become a problem if things don’t change. Eventually you have to stop building roads and start building cars to drive on those roads. But that only works if you have people who will buy the cars.
A consumption-driven China affects all of us. Machinery exporters, energy suppliers, and raw-material producers all look to China as a key market for their products. As China moves from a manufacturing to a services-based economy, the beneficiaries will change: less mining, and more retail. Is there a Wal-Mart in China’s future?
But less saving and more spending in China means less of a surplus there to fund our deficit here. If our economy adjusts, the benefits could be enormous. But only if we’re ready.
Douglas R. Tengdin, CFA
Chief Investment Officer
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