The China Card (Part 4)

So what does China need to do?

The answer on everyone’s lips is growth: growth in output, growth in exports, growth in employment. If you have a growing economy, the additional economic output can cover a multitude of sins.

But that’s actually been a problem in China. They’ve grown so strongly that they haven’t needed to be efficient. So issues of pollution, congestion, moving millions of people from the interior to the coastal manufacturing clusters, and quality control, overcapacity, and bad debts are catching up with them. Government controls on interest rates, foreign exchange, and energy prices mean China now has a bunch of debt-laden, energy-hungry exporters that are struggling to remain competitive.

Prime Minister Li Keqiang noted in a recent speech, though, that the state is planning to reduce its role in economic matters in the hope of unleashing the nation’s creative energy. Whether this initiative moves from rhetoric to reality is an open question, but at least they’re talking about deregulation and reform.

And it can’t come too quickly. With Europe still in recession and US growth stuck in second gear, China’s exports have sagged. But there won’t be another major government stimulus package, as there was in 2008. The central government is worried about mounting local government debt and more bad loans.

China is at a crossroads: a return to cronyism or accelerating reform. The road to reform may be rocky, but at least it doesn’t end in a bureaucratic cul-de-sac.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-05-28T09:31:49+00:00 May 28th, 2013|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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