Blogs & Comment

Investing in the China of the future

I believe China needs to rebalance its economy and the changes to come should generate a new array of opportunities and risks for investors. This is in addition to the need to let the yuan appreciate more substantially, as discussed in On the Precipice.
That China needs a new growth model is not a radical statement. Chinese leaders themselves are concerned about the nature of Chinas growth. Speaking at a conference recently, Premier Wen Jiabao declared: In the case of China, there is a lack of balance, co-ordination and sustainability in economic development.
According to Peking University professor Michael Pettis, investment spending in China rose from 32% to 46% of GDP while consumption spending declined from 45% to 36%, over the dozen years to 2009. China’sshare of consumption in GDP isone of the lowest in any industrialized country.
The massive run-up in investment spending financed the industrial infrastructure for Chinas export-led industrial strategy. More recently, investment spending has been pumped up by the infrastructure package assembled to fill in for the recession-induced slowdown in exports.
But the export-led development model eventually runs into the constraint of massive over-investment and misallocated capital, warns Mr. Pettis. At some point the saturation level will be reached and China will have to deal with the challenge of how to sustain demand without investment spending.
The obvious answer is that higher consumption spending can come to the rescue. And that would seem to imply opportunity for Western firms that export consumption-related goods and services.
For a start, we could consider the advice of Singapore resident and investor, Andrew Hallam. During a recent visit to China, he couldnt help but notice how the nouveau riche had a taste forWestern goods. “To capitalize on Chinas growing wealth, buy the stocks of name-brand Western products, he recommended. They want Porsche, BMW, Audi, Rolex, Cartier jewelry, Starbucks and McDonalds.