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A deeper look at China growth

Patrick Ho, Head of Asian Equities
AMP Capital

To make better educated decisions about the impact of China’s growth story on investments in the period ahead, it will pay to look under the hood of indices, and garner a deeper understanding of the composition of growth, rather than look to a final number as indicator of salvation.

During the global financial crisis (GFC), one could observe a popular sentiment: That many Australian companies, in particular miners, and even the Australian economy as a whole, had looked to China for deliverance.

China’s economy, fuelled by debt-driven investment in infrastructure and real estate, recorded double digit gross domestic product (GDP) growth for much of the past decade, including through the GFC. Chinese demand for raw materials, such as iron ore, underpinned many prospects for Australia and resource trade dependent companies.

While China will still be a voracious consumer of raw materials in the period ahead, the golden age of creating expansive toll roads and real estate development is over. This has hurt the Australian economy and segments of the Australian share market reliant on Chinese investment demand as well as contributed to a fall in the A$.

China’s leaders are seeking to guide the world’s most populous nation toward consumption and away from debt-driven investment.

China announced reforms in November 2013 aimed at improving the nation’s growth path over the next decade by fostering sustainable growth and reducing obstacles.

As investors try to determine the pathway of this rebalancing, the effects of uncertainty creates share market volatility.

While reforms and a rebalancing of the economy will be approached with caution, they support a way forward for a shift in quality of growth over quantity of growth.

The fundamentals of a consumer based economy are positive in the period ahead. Chinese wages keep rising and imports of food and consumer goods keep rising.

Over a decade ago, if a business desired to build a cinema in China, the project would not likely have been profitable as people’s consumption habits would purchase cheaply pirated DVDs in the streets. Now, however, China has the 2nd highest cinema revenue after the US. With development of China and the creation of growing consumer class, more people want to be entertained and with more disposable income there is a shift in behaviours.

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