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China roadmap

Market Commentary

17 June 2015

China’s historic growth model relied on exports which worked very well, but has now become obsolete. China is now making huge strides in adjusting to compete in the future - which opens up exciting potential opportunities for investors.

For several decades China’s growth model relied on exports. Taking advantage of strong external consumer demand fuelled by debt in the Western world and gaining market share at the expense of competitors in Emerging Markets (EM) by managing its currency, China was able to become the world’s greatest export-led economy. China tapped its enormous reserves of rural labour to increase output with only a marginal impact on the cost of labour. Every decade or so when the economy ran into capacity constraints, China would engage in huge waves of investment and then resume exporting with renewed vigour.

This model of growth worked well, but has now become obsolete. Debt fuelled demand in the West is over. The ability to weaken the RMB versus other EM currencies is exhausted. The economy is running out of cheap labour.

Without adjustment China risks stagnation, a hard landing due to resource misallocation issues and loss of its ability to control the economy if RMB becomes an endogenous variable. The full research is available on the link below.

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