25 August 2019
The magnitude of the housing problem in China is much smaller in relative terms than it was for the US in 2007. Photo: HKEJ
The magnitude of the housing problem in China is much smaller in relative terms than it was for the US in 2007. Photo: HKEJ

Why worry about China?

China is slowing down from very rapid growth rates. Retail sales are rising 9-10 percent year over year, down from 17 percent, but the growth is still faster than in most other regions.

What about trade with other entities such as Japan, the US and Europe?

Only 1 percent of the US economy is based on trade with China, according to official statistics.

So China’s slowdown, while a concern, is not enough to bring the economies of the rest of the world — those big developed economies — to zero growth.

Also, there’s talk of a housing bubble bursting in China. Could this be similar to the 2008–2009 bust in the US?

Mortgage debt in China related to houses whose prices may be falling is only about 25 percent of GDP compared with 82 percent for the US economy in 2007.

So the magnitude of the housing problem in China is much smaller in relative terms than it was for the US.

What about the stock market?

The talk is that the fall in the Chinese stock market — and this is over the past three months — has been very dramatic at minus 30 percent.

What we should consider is that the Chinese market had run up more than 100 percent before the crash.

No one said the run-up in their stock market was actually boosting world growth, so in my view, I don’t think a 30-35 percent decline is going to dramatically subtract from world growth.

More importantly, the wealth effect in China is minimal.

Less than 10 percent of the Chinese public own stocks.

In the US, the comparable number is 55 percent, so the decline in shares there is an effect that we should worry about in subtracting real economic growth from the rest of the world.

But here’s one thing that does matter — it matters in two different ways — and that is China’s effect on setting commodity prices.

Due to China’s rapid growth over many, many years, it became the marginal price setter of many important commodities such as iron, copper and oil.

And as the economy slowed, China used less of that commodity and prices have fallen.

It’s hurting the energy industry and the materials industry and we’re seeing that in profits for the second quarter of 2015, particularly in large-cap companies in the US.

But history shows that when commodity prices fall, as commodities are an input cost, the result is a boost to consumption worldwide, helping most other companies that actually use oil or commodity prices as an input cost.

It benefits places such the US where consumption is 75 percent of economic activity.

The US consumer gets a break in terms of real effective income by spending less on energy and it tends to boost economic activity and tends to boost growth.

My view of the China situation is this: it’s certainly a concern and it’s a concern for the leaders there and investors in China.

But world economic growth, which so far seems to be on firm footing, continues despite the slowdown in China and despite the bursting of what we would call asset inflation in certain parts of China and the decline in commodity prices being a net benefit for much of the world.

MFS Investment Management, a global asset management firm based in Boston, focuses on institutional investors in the Asia Pacific region.

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The author is Chief Investment Strategist at Massachusetts Financial Services

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