How Sustainable is China's Growth?
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lost in all of the discussion about China’s rise to the top of the economic mountain has been the sustainability of said rise. In looking over history we see periods of hundreds of years where a particular society or nation dominates the global economy of the time: the British in the 17th through early 20th centuries, the U.S. for the past century are the two most recent examples. So, while anyone can look at the capital shifts that are happening right now and see the direction is clearly towards China and away from New York, what is not as clear is how long that shift will last and will it necessarily be so unilateral.
China’s one child policy has created fertility rate and, consequently, a demographic profile that is not conducive to a sustained economic empire. The current fertility rate is 1.56 children per family and its population is due to peak in 2026 with a rising proportion of its population moving out of the workforce. Population demographics are a powerful factor in how capital is deployed in a society. I am not suggesting that all societies with the same age histogram respond to the situation the same. That would be nonsensical.
What I am suggesting is that this will be a stressor on China’s long-term economic projections and necessitate a response. If China’s total labor costs rise due to shifts in their demographics then makes perfect sense that they would expand their trade to source their needs from countries with better population demographics.
Enter China’s neighbors. Moreover, look at the headlines, or at least behind the major ones emanating from the West, which show quite clearly that China is making massive investments in their neighbors to the South as well as their populations are migrating north into Russia (Market Vectors Russia ETF, AMEX:RSX) and Mongolia. Russians are moving out of Siberia, since the Soviet Union no longer mandates that they live there. Mongolia is one of, if not the, fastest growing economy in the world as it opens up its vast mineral and energy resources to mobilization. It overtook Australia as China’s largest supplier of coal in 2011 and is doing so at one-third the price.
To me, though, it is the investments and expanded trade between the ASEAN nations, set to become China’s largest trading partner by 2015 and the ‘birth’ of the Asian Economic Community, that indicates China’s governmental and business leaders understand the situation and are laying the groundwork to mitigate the effects of their aging population.
What China is Doing
Currently ASEAN ranks third in total trade with China, having surpassed Japan in 2011 with $362.2 billion. This was a 24% increase over 2010. The current goal is for that number to rise to $500 billion by 2015 and the current trend makes it likely that number will be easily surpassed by then. Currently the E.U. is China’s leading trading partner at $567.2 billion, followed by the U.S. at 446.6 billion.
The rate of change of these numbers should further underscore this point. In the first quarter of 2012 trade between China and the E.U. increased 2.6% but with ASEAN jumped 9.2%.
Vietnam, Cambodia and Myanmar all have extremely favorable population demographics, comprising a total population of 160 million people. China’s FDI into their southern neighbors has skyrocketed. Myanmar has seen $13 billion in investment between 2008 and 2011, including $1 billion in a 2000 km oil and gas pipeline system that would link the Bay of Bengal with the city of Kunming. Investment into Cambodia in 2011 was $1.19 billion, which more than 8% of GDP.
Ties between China and Vietnam have expanded as well, with Vietnam. For the first quarter of 2012 Chinese/Vietnamese trade stood at $2.6 billion, or 10.5% of Vietnam’s total trade. This has helped send the VN Index and the Market Vectors Vietnam Index ETF (AMEX:VNM) up more than 30% in the first quarter of 2012. As China plots out a more subdued rate of GDP growth, think 5-7% as opposed to 8-10% annually, and continue towards Yuan convertibility and financial sector depth this should stabilize the returns investors can expect. The iShares FTSE China 25 Index Fund (NYSEMKT: FXI) has a beta value of 1.26 and the dividend has been very variable, paying out $0.69/share June 2011 but only $0.08/share in December.
The biggest impediment to Chinese-ASEAN trade will be how the oil and gas rich South China Sea is handled. China claims the entirety of the South China Sea as theirs while Vietnam, Indonesia and The Philippines also lay claim to portions of it. Recent skirmishes prompted a push at the recent ASEAN Summit to get members to agree to push for a uniform code of conduct and international dispute resolutions. China was successful in getting sitting chair Cambodia to leave the issue off the agenda, but it was pushed for by The Philippines to be discussed. The upshot is that nothing has been resolved at this point, but increased trade among and between ASEAN partners will compete with China’s relationship with individual members in settling the issue long term.
As of right now it looks like there is a lot of maneuvering as these countries continue to build up their infrastructure, which necessarily have to cross political borders to serve the growth that is coming to the region. The capital flight from West to East is not just flowing into China, contrary to the reports in the U.S. financial press. A great deal of it is finding its way into the last frontiers of the Greater Mekong Sub region (Vietnam, Laos, Cambodia) and the rest of ASEAN some of which by way of China’s highly publicized trade and current account surplus. It is in this way that China is diversifying itself to continue growing rich before it gets old.
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