Steve Johnson is chief investment officer of Forager Funds Management.
China’s economy had me puzzled back in 2011. My understanding was that the country’s growth miracle was founded on exporting cheap goods and labour to the rest of the world. That, presumably, would make it highly dependent on global GDP growth.
Yet as the United States and Europe – which combined, make up some 50 per cent of global GDP – were muddling their way through the worst recession since the 1930s, China was reporting economic growth of well in excess of 10 per cent per annum. How is it possible for an export-driven economy to grow at double-digit rates when its main trading partners are shrinking?
As an Australian fund manager, I needed to answer that question. China’s hectic growth was driving voracious demand for Australian resources. That, in turn, was propping up our economy and sending resources stocks (we didn’t have one in the portfolio) to stratospheric heights.
My research uncovered all the usual bull and bear arguments. The bulls argued that China’s migration of its population from unproductive peasants to educated city-dwellers had many decades to run, and that China’s GDP per head was still a small fraction of that in the US or Japan. The most common bear argument seemed to be that a communist government could never create a first-world economy.
None of this made much sense to me. If all you needed was hundreds of millions of rural workers and a large gap between your GDP and America’s, then India and Indonesia should also be growing as fast as China. And, as for the Communist Party, they made a decent fist of it over the prior 30 years. In fact, the ability to build decent roads and airports seemed something of an advantage when compared with the dysfunctional political system in the US (or Australia, for that matter).
Then I stumbled across research by Michael Pettis, a professor at Peking University in Beijing.
IT’S THE INVESTMENT, STUPID
First, Pettis outlined what was happening in China’s economy. Net exports had indeed fallen, from 8 per cent of GDP in 2008 to 4 per cent in 2009, but even the 8 per cent was much smaller than I had expected for an “export-driven” economy. That went some way to explaining why the global recession wasn’t pounding China’s economy.
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