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Economies and Markets.
CHINA’S “NEW NORMAL”
:
OPPORTUNITIES IN A SLOW-GROWTH
ECONOMY.
Anh Lu
Portfolio Manager,
Asia Ex Japan
Equity Strategy,
Hong Kong
Chris Kushlis, CFA
Asia Sovereign Analyst,
London
Yoichiro Kai, CMA
Equity Research Analyst
Commercial Banks (Japan,
Greater China, and India),
Singapore
PRICE
POINT
November 2015
Timely intelligence and
analysis for our clients.
EXECUTIVE SUMMARY
Headlines about China have grown increasingly pessimistic as the country
experiences its weakest economic growth in many years. China-driven worries have
recently fueled a renewed slump in commodity prices and an emerging markets sell-
off, adding to long-h
eld concerns that the country could experience a “Lehman
moment” after a rapid rise in debt since the 2008 global financial crisis. While T. Rowe
Price investment professionals do not think China is on the brink of a full-blown crisis,
we believe that Chin
a’s large debt level will weigh on its growth for many years. This
slow grind scenario raises the likelihood that China is in for a long period of below-
potential growth similar to Japan’s lost decades starting in the early 1990s. Despite this
bearish backdrop, we continue to see opportunities in select Chinese companies,
many of which are adapting to slower topline growth.
WHAT IS CHINA’S “NEW
NORMAL,
” AND WHY IS IT HAPP
ENING NOW?
In May 2014, Chinese President Xi Jinping announced that China was in a “n
ew
normal” of slower economic growth. The new normal comes as China’s economy is
shifting to new growth drivers and away from the old growth model that relied on
manufacturing and investment. While the old growth drivers worked remarkably well for
the past three decades, in recent years,
China’s GDP growth has slowed even as
investment has increased. Because the old investment-driven model is producing
diminishing returns, China’s growth model had to change.
Manufacturing has long been China’s growth engin
e, but the services sector is
gradually taking its place. Moving away from a manufacturing-driven economy to one
led by services and consumption is a long process that will take many years. This
transition will entail a lower growth rate than the double-digit GDP expansion rates of
previous decades.
A SPECTACULAR RISE IN DEBT
A big factor driving China’s changing economy is that its old model was funded by
debt
—an unsustainable growth driver over the long run. China’s debt level climbed
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IAFEI Quarterly | Issue 31 | 22