Muddle in the Middle Kingdom

Where is China going?

The conventional wisdom seems to be, anywhere it wants. China is now the world’s second largest economy, and if it continues to grow 6% faster than the US, it will be bigger than the US economy in 15 years. But the past isn’t prologue. While many expect China to run everything, in China they’re running scared. They’ve had an investment led economy ever since Deng Xiaoping broke with Mao’s orthodoxy in 1978. Investment-led economies can and do grow at elevated rates for a while. But all good things must come to an end, and the investment boom will surely follow this dictum.

Look at it this way: China is building its industrial base. It’s building factories to produce the materials to build more factories. This kind of bootstrapping can provide rapidly expanding growth, but eventually it overshoots. In the Southwest of the US homes were built to house all the people moving into the area to work in homebuilding. The world can’t afford for China to become an immense housing bubble.

But there are examples of economies that successfully transitioned from an investment economy to a consumer economy: postwar Germany industrialized intensively during the Marshall Plan era, and then moved to a consumption-led economy in the ‘70s, as did Korea in the ‘90s. But success isn’t guaranteed. For every Korea, there’s a Japan. What’s the difference?

Ironically, it seems to be openness to imports. Countries that let their consumers buy what they want from where they want seem to transition more easily to consumer-led societies. Will China follow this model? I’ll quote Confucious: “The middle way is best.”

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-05T20:52:57+00:00September 28th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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