Despite the bonhomie on exhibition during Prime Minister Albanese’s visit to Beijing, all is not well with China’s economy. Foreign investors in China are pulling back from an economy that was regarded for many years as a prime destination for global investment. Direct investors took out $11.8 billion more from China last quarter than they put in, the first net outflows since records began in 1998. Portfolio managers are fleeing too, with an unprecedented three straight months of equity outflows to the end of October.
Source: Bloomberg
Those outflows may continue for some time given China’s economic struggles. The world’s biggest exporter is suffering a decline in shipments abroad, as the cumulative burden of trade disputes, regulatory crackdowns, high youth unemployment and the global turn toward onshoring takes its toll. Data due this week are expected to show a return to deflation, and seemingly endless real-estate collapses underscore the economy’s struggles to regain momentum.
Authoritative China expert, Michael Pettis, notes that it’s not just internal constraints that matter. External ones will count just as much, even if they are less discussed both inside and outside China and less well understood. According to Pettis, examining China’s economic structure, he observes the following:
“Investment accounts for roughly 24% of global gross domestic product, and consumption the remaining 76%. Even in the highest investing economies, the actual investment share of GDP rarely exceeds 32-34%, except for short periods of time…China, however, is an extreme outlier. Investment last year accounted for around 43% of its GDP, and has averaged well over 40% for the past 30 years. Consumption, on the other hand, accounts for roughly 54% of China’s GDP (with its trade surplus making up the balance)…Put another way, while China accounts for 18% of global GDP, it accounts for only 13% of global consumption and an astonishing 32% of global investment. Every dollar of investment in the global economy is balanced by $3.2 dollars of consumption and by $4.1 in the world excluding China. In China, however, it is offset by only $1.3 of consumption.”
China’s issues will not disappear anytime soon. And although it is good to see Australian and Chinese trade relations on the mend, it would be beneficial if we continued to deepen our links with other Asian countries, especially India.
Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770. The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.
