Season Investments

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Macro Update: China's Engineered Slowdown

Posted on March 20, 2012

Our Macro Radar identifies the most influential macro factors impacting capital markets. Currently on are radar are: Eurozone Sovereign Debt Crisis, Global Central Bank Policy and China’s Engineered Slowdown. We are removing US Fiscal Policy from our radar given the recent extension of the payroll tax cuts.

CHINA'S ENGINEERED SLOWDOWN

Despite the fact that Europe has been dominating front page news for some time now, recent developments in China’s economy and policy-making are also very influential to the performance of global capital markets. China is especially relevant to our investment thesis given our relative emphasis on commodities and emerging market assets.

Despite boasting the second largest economy in the world and being home to 20% of the globe’s population, China is still very much an “emerging” market. When measured on a per-capita basis its economic output falls from 2nd all the way down to 91st. Current consensus, however, is that China will continue on its long-term path of high growth and eventually become the dominant global player, surpassing the United States at some point in the next twenty years. From a long-term perspective China’s growth story will clearly be one of the primary trends over the next several decades.

Changing Landscape

The reason China is currently on our Macro Radar, however, is that on a shorter-term basis the economic and policy landscape is at an important transition point. Growth has slowed from a double-digit pace just over a year ago to an 8.9% annual rate in the 4th quarter last year. Furthermore, Chinese officials just lowered their GDP target for the first time in over seven years from 8.0% to 7.5%, triggering a sharp selloff in stocks and commodities in early March. While the chart below shows that “a target is just a target”, and that actual growth has a long history of exceeding targeted projections, we believe the decrease in the official target is symbolic of a more structural shift in the Chinese economy.

Historically the two primary drivers of economic growth in China have been public investment and exports, but plans are now in place to begin a focused shift away from these two drivers toward a greater emphasis on domestic consumption. For one thing, Chinese infrastructure is already overbuilt relative to the maturity of its economy, so it appears that new investment will not be the growth tailwind that it has been in recent years. Additionally, a slowing European economy, appreciating currency and rising cost of labor in China will prevent export growth from being as lucrative as it has been in the past. 

A new chapter is now being opened on China’s economic growth story. The recently-announced “5-Year Plan” (the twelfth of its kind) makes the growth of disposable household income a top priority. Policy and stimulus spending will be more focused on education, tax reform, deregulation and social programs, to include 36-million low-income housing units slated for construction between now and 2015. At only 35% of GDP, private consumption in China currently sits at an extremely low level with tremendous room for improvement. Additionally, Chinese citizens have ample liquidity to drive a new trend in consumption. Personal savings currently sit at $5.3 trillion – more than the annual economic production of Brazil, Russia and India combined.

Engineered Slowdown

Against the backdrop of this structural shift, the Chinese are attempting to engineer a controlled slowdown of inflationary growth and sky-high property prices. This is a tedious process, as policy makers attempt to control the slowdown without going too far in the wrong direction. After aggressively tightening monetary policy in 2010 and 2011, inflation is now at a two-year low and property prices and sales activity have begun to decline. In light of these recent successes, some of the tightening policies that were instituted to trigger the slowdown are already beginning to be reversed, signaling that perhaps the next move will be towards a more accommodative policy. We view this as a bullish development in the near-term for risk assets.


We want Transparency to be one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. Regular Macro Updates will address our economic and capital market viewpoints and discuss top-down portfolio positioning. Also watch for Micro Updates which convey our reasoning behind specific investments.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.