China, All the Way to New York By: Gabriel PotterMBA, AIFA® 2015.09.01

Another week, another dizzying stock market repricing.  As a reminder, the problems in the US stock market aren’t really homegrown.  The market shocks begin overseas - China, primarily – and the shock waves flow through Asia’s markets, European markets, all the way to Wall Street.

The traditional treadmill of an emerging economy to a developed economy is never easy.  First, as cheap, plentiful labor and a burgeoning sense of possibility takes hold and cottage industries, garment-factories, raw material exports, and unskilled labor intensive jobs take hold.  Then, with greater sophistication, complex and interconnected chemical and machining factories bloom with a growing service industry.  Here, the Chinese government had trouble, given their system’s muted enthusiasm for independent entrepreneurship.  China had two options:  accept slower growth and the stability of their current system or embrace organic change.  They did neither; they opted to keep the growth targets high without changing the underlying business culture. 

The high growth targets of the Chinese government are admirable, but the methods used to sustain these targets have been specious.  Still, they have plenty of advantages.  For instance, the Chinese government had huge foreign currency reserves, so they could compensate for intermittent weakness in the business climate with grand construction projects.  Given their huge spending projects, it’s easy to shield these weaknesses from global investors, for a while anyway.  Unfortunately, huge factories, large apartment high-rises, and shopping malls are now largely empty.  A well-financed government can spend its way to short term growth, monetary stimulus, and explicit market supports, but investing in long term growth factors takes a more nuanced approach. 

In context, most economists believe China still has great potential for growth and will still be a formidable player in the world economy for decades.  However, the notion that China can achieve annual returns of 7% ad infinitum, with or without changes to their business culture?  That myth is gone.  

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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