One of the more interesting numbers behind the last Chinese GDP growth headline figure is the proportion of that growth which is due to domestic demand. Fiduciary investors have been getting set for the domestic demand theme in China for some time, of course. Well, it’s here in a big way.
While the country carried on its merry way with another year of double-digit growth in 2010, exports have sunk to be a single-digit contributor. According to China’s National Bureau of Statistics, 92.1 per cent of last year’s 10.8 per cent GDP growth came from domestic demand.
While western economists are always sceptical of Chinese economic statistics, which tend to be revised frequently, the magnitude of that number is such that even if it is an overestimate it would still confirm an end to the stereotype of China as the world’s factory.
China still has a lot of factories. But most of them are now servicing Chinese demand. And, more importantly, tertiary industries with higher value-add are making up an increasing share of the growth.
For investors, this has a massive strategic importance. The story is not new, though, and the big question is more of a tactical one: are prices already reflecting the trend, or maybe even ahead of the trend?
The Chinese authorities have announced that they would be managing down the growth rate to closer to 7 per cent a year over the course of the next two years. This is partly an economic decision and partly political.
While it is certainly not clear that the Chinese economy represents a bubble, it is clear that investors are anticipating a “landing” of some sort fairly soon – either hard or soft.
But several studies have shown that there is only a slight correlation between a country’s GDP growth and the performance of its stock market, even after adjustment for lags. With respect to China and, to a lesser extent, India, the tactical decision relates to price while the strategic decision relates to the rebalancing of the world economy away from the Occidental and towards the Oriental.
As evident from last week’s annual Asia Pacific conferences for pension funds and managers produced by Mercer Investments in Singapore and Melbourne, fiduciary investors are already re-weighting their global equity and bond portfolios.
But many do not really know what their underlying exposures to various countries are. Thanks to globalisation, it is impossible to tell one’s exposure to, say, China, without an analysis of each stock in the portfolio. What proportion of each stock’s sales and purchases relate to China? Few funds have undertaken that analysis.
This presents an opportunity for the big custodians to step up and provide an extension of their performance and analytics services. There is not much point in a pension fund investment committee taking an informed view of the world if it cannot accurately identify where in the world its investments really are.
