Beware the Chinese slowdown

The following article appeared on Livewire on December 11, 2019.

I am a long-term, business-focused investor who does not spend too much time on macroeconomics. Still, as a Sydney-based global manager, I would be remiss to not acknowledge the slowdown facing Australia’s most important trading partner, China.

The Middle Kingdom consumed 31% of Australia’s exports in 2018, according to the ABS, which is more than Australia’s next four largest trading partners combined, so I suggest Australian investors of all stripes sit up and pay attention as well.

China’s remarkably steady drumbeat of GDP growth has slowed to 6.0% year-on-year growth in the third quarter of 2019. While still an impressive mark for most countries, this is the slowest growth rate in this tightly managed number since the Chinese government began publishing quarterly GDP numbers in 1992. Also note that China is clamping down on capital flight– not something that typically happens when the local mood is positive.

A tailwind to China’s growth over the past decade has been its expanding balance sheet. The Institute of International Finance estimates that China’s total debt is now 303% of GDP, up from the mid-to-high 100%’s prior to the GFC. Not only has this debt made the economy less robust but the likely lack of a repeat expansion means the next decade of Chinese growth likely will look very different to the last.

Some investors are quick to point out that the internalised nature of much of China’s debt and the tight grip the Chinese government has over its economy should help the country navigate a crisis. Both are true to a point – but only to a point – and place considerable faith in bureaucrats who have relied very heavily on stimulation as a solution.

I’m not wholly bearish on China and wish the country well. I am wary about the current health of its economic model, though, and have less exposure to this much-touted economy than most would expect.