China

Risks

There are many risks to the China story. They include a large reliance for growth on investments, inflation concerns, a US consumer spending slowdown, environmental degradation, non-performing loans, and political turmoil (internal and external).

There are also global risks such as a financial meltdown, a disease pandemic, massive environmental destruction, etc., but I think that if you are worried about those you need to hedge yourself with gold and non-industrial commodities.

I think that all of the China-specific risks are either not really big problems or are not problems that will threaten growth for the next 2 years. If something happens that would change the current scenario of course we would have to reassess.

Here’s why:

Reliance for growth on investments is risky but there remains no reason for the investment to slow down. Chinese wages have gone up but productivity has increased making China even more competitive. Even if there was a slowdown in foreign investment, savings in China are huge and there is plenty of money to replace foreign investment for a while. The economy is also overheating and would thus benefit in the short-term from a bit of a slowdown. The same applies for the dependence on the US consumer. The government could increase spending as well as encourage consumer spending to more than offset a drop in investment and exports. Additionally a drop in the currency and interest rates would help and lower rates would also let housing shine and support the economy.

Inflation concerns are easier to deal with. China just needs to let the currency rise. This would certainly slow down exports. I think the main reason the government hasn’t done this is because they want as much investment as possible as quickly as possible so China can modernize and move up the value-added chain.

Environmental degradation is more of a slow approaching problem. Non-performing loans will only surface when the economy runs into trouble. This won’t be something to cause a slowdown but would make a slowdown worse.

Internal political turmoil shouldn’t be a problem until the economy begins to falter and external turmoil such as a trade backlash shouldn’t become too much of a problem very soon. This type of backlash would come slowly in my opinion. I think most decision makers in the US believe that trade is beneficial to the US economy and certainly is for US multinationals.