Chinese Economic Outlook 2014 – Breaking through the Great Wall?

Throughout last year, many of the naysayers were suggesting that China was about to implode – something that has yet to materialise and to be honest is unlikely to, next year either. As the world’s second largest economy rolls forward.

China’s growth has slowed down in recent years – with forecasts around the 7 to 7.8% range for 2014. While this is certainly slower than the frothy days of 12% in 2008. Let’s take a step back and consider a broader context, for a moment.

China’s GDP has increased FIVEFOLD since 2000. As a consequence, in real terms. A growth rate of 7% of current GDP would be similar to a growth rate of 36% on the GDP of 2000!! As such, the economic impact is considerable and the Western world, with stagnant growth. Would no doubt give its right arm to have such growth!

There are a number of factors that are sitting in the wings for China. As it embarks on the next leg of growth. Lets explore some of these in more detail, and consider their impact.

Population changes

For the first time in a while, the country is relaxing its one child rule – albeit in a controlled way. Specifically, if one of the parents themselves are an only child – highly likely, since the one child policy has been in place since 1980 – then they may have two children. While on first brush, this may seem likely to cause a population spurt, however, China’s fertility levels are reported to be below a level necessary for population replacement, let alone growth. As such, this shift in policy may result not in growth, but stabilisation.

Population re-location

The exodus from the land to city in China is almost beyond belief in terms of the scale. Around 10% of the population lived in cities in 1949, around 20% in 1979 and now the number sits at 51% (691m people) that is! This is a simply staggering shift – the flip side of which is the congestion and pollution that has come hand in glove with the industrialisation that has also occurred.

Now while that is the current state of play, research suggests a further 75m new homes are needed, and while the media has focused heavily on the “ghost cities” and the lack of population – build it and they will come – seeming yet to have kicked in.

Probably the biggest issue within the real estate sector for China is affordability – something that many Sydneysiders will be able to relate to. With many in rural areas earning around $2/day, the notion of moving to the city or indeed into one of the many unoccupied Condos is simply not possible and this may prove to be a substantial issue for China. With funding used in many instances to build and of course buy those apartments, who is going to be paying or, perhaps more pressing, how is the valuation looking?

Credit Bubble

Steps are going to need to be taken to tackle the growing amount of debt. This figure has grown from $9trn to $23trn in just the past five years and much of this relates to the property market.

That said, infrastructure spending looks set to continue, as rail links, redevelopment and new cities continue to be built. While some talked of collapse, our view is that China is about to embark on its next leg of growth. As such opportunity will continue to abound.

On the World stage

As it becomes increasingly confident in its shoes, as the World’s second largest economy, there will likely be some further economic and military muscle flexing on the world stage – the current issues relating to disputed territory with Japan, being a good example.

From a trading and investing perspective, we continue to have a long bias toward the iron ore sector and that which goes with it – the seemingly insatiable demand from China for raw materials. While this sector clearly has vulnerability to any major slowdown in China, however, with India in the wings and in equally vast needs, when it comes to raw materials, the outlook for the resources stocks remains very supportive.