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China in transition


John Carran

Written by John Carran

Senior Economist at Kiwi Wealth
John's responsibilities include monitoring economies and markets to identify both investment opportunities and risks across asset classes, regions, sectors and industries.


Chinese_cityscape.jpgA changing face

On my car ride from Shanghai Pudong Airport to the centre of Shanghai during a recent trip there, I noticed the dearth of construction cranes jutting into the sky. Having noted this feature on my last trip to the city 15 years ago, I wondered whether the lack of cranes heralded a malaise in the Chinese economy. This thought was dispelled somewhat upon my arrival, by the swish office towers, upmarket stores and restaurants, shopping masses, and technology I saw everywhere.

New economy in, old economy out

Talking to economists and market traders in Shanghai the picture became clearer. Yes, China’s economy is slowing. But, there are substantial divergences in the performances of different parts of the economy. The old economy – made up of heavy industry, manufacturing, and mining – is shrinking. Meanwhile, the new economy of technology, telecommunications, healthcare, and services is booming. Consumption is steadily rising, and is now around 60% of China’s economy. This is on a par with the United Kingdom, although still a little way below the US.

Shanghai represents the new economy. So too do other eastern parts of China, particularly the so-called Greater Bay Area of Guangzhou, Hong Kong, and Macau, and the tech-dominated cities of Shenzhen and Guangdong. The old economy still exists, but it’s being pushed to the central and western parts of China where land is much cheaper. The government is facilitating this move through massive infrastructure building in the new industrial bases.

Technology leading the charge

Meanwhile, technology companies are making hay. Research and development spending is rapidly catching up with the developed world. Chinese internet behemoths, Alibaba and Tencent, dominate the technology landscape in areas like e-commerce, social media, and financial technology. But, there’s plenty of other technology companies coming up behind them. Chinese people are very mobile tech-savvy. On my trip, I noticed that Shanghai locals relied on their smartphones a lot more than most Kiwis do for organising many things in their daily lives – shopping, deliveries, payments, banking, investments, communications… the list goes on.

Policy cleaning up excesses

I arrived in China only days after the conclusion of the 19th Party Congress, the five-yearly Party meeting to elect leaders and discuss plans for society and the economy. The big theme of the Congress was reform, with the mantras of “quality over quantity” and “sustainable growth”. Leaders are quite prepared to sacrifice some economic growth to make progress in these areas. A key part of putting intentions into practice is cleaning up some of the excesses that have developed as a result of China’s rapid growth.

State Owned Enterprises (SOEs), which are the dominant firms in the old economy, are being rationalised and forced to become more productive. As a result, surplus capacity has been substantially reduced, and most SOEs are now profitable, after previously losing money. Industry is also being coerced into being more environmentally friendly. Many smaller SOEs are being forced to close because they cannot afford to meet new stringent environmental standards.

Debt is the biggest challenge

The biggest economic challenge facing China at present is its massive debt burden – around 270% of economic output. President Xi has declared that this is a national security issue, as it threatens the economic and social progress that China has made. The Chinese authorities are making concerted efforts to restrict credit, particularly to the most heated parts of the economy. There are signs that debt as a share of the economy is starting to stabilise, after many years of rapid growth. China’s continued progress will be dependent on enterprises getting on top of their debts and the trend reversing.

Current and future investment opportunities

Given its size and growing influence, it will be increasingly difficult to ignore China as an investment destination. Kiwi Wealth already holds a number of Chinese shares through listings in Hong Kong and the US. As the Chinese economy and markets develop we will likely increase our China investments in the future. We’ll continue to keep a close eye on the country to assess emerging opportunities.

Joseph Chan

The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.

Tags: Economy

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