In many walks of life, identifying a problem is one thing, but solving it is quite another. This is certainly the case when we consider China’s attempts to adjust its economic and monetary trajectory after a sustained period in which the country’s rapid re-industrialization went hand-in-hand with massive investment spending.
As a share of GDP, China’s investment spending reached unprecedented levels in the years leading up to and following the global financial crisis. This was, of course, unsustainable over the longer term and it was widely recognized by China’s policymakers that the economy must be ‘rebalanced’, with domestic consumption needing to account for a larger share of output and overall investment needing to decline. This has been commonly depicted as a rebalancing away from the ‘old economy’ (secondary industries such as manufacturing and oil refining plus property), to the ‘new economy’ (service industries such as computer services and tourism). The chart below shows how China’s rapid economic growth prior to the global financial crisis was driven by the ‘old economy’.
Breakdown of Contribution to China’s % Year-On-Year Nominal GDP Growth by Industry
Source: Bloomberg 4/4/19
If China’s economy was to be rebalanced, it was inevitable that economic growth would slow, which the chart clearly shows to be the case, particularly since 2012.
However, what has not been discussed quite so frequently is the fact that, whenever policymakers have needed to stimulate the economy, it has tended to be the constituents of the old economy’ which have been ‘juiced up’. The chart above shows how the acceleration of the Chinese economy between 2009-11 and 2016-17 was almost entirely driven by the ‘old economy’. More than anything, within that, it is the property sector that drives the big swings in China’s economic growth. Property accounts for 86% of household wealth, while 87% of urban households own their own property and 27% own at least one empty investment property. Around 65% of loans are backed by property collateral, and the government funds 60% of its spending through land sales, which depend in turn on rising prices for empty investment properties.
Combined, the statistics point to the property market as the lynchpin of the Chinese economy. For all the talk of a consumer-led rebalancing, if Chinese monetary stimulus is going to help drive a reacceleration of global growth this year, we contend that it won’t be via the Chinese consumer, but instead it will be through China’s property market.
This is a financial promotion. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved.