China’s economy is humming! That was the standout message from the CLSA investor conference I recently attended in Hong Kong – one of the largest and most significant investment conferences in the Asia pacific region.
China’s continued economic strength is supported by the government’s economic initiatives, including supply-side reforms, and stimulus measures, particularly increased infrastructure spend. According to consensus forecasts, China’s growth is currently at around 7% for this calendar year. With government infrastructure spend set to continue, the outlook remains positive and expectations are that China’s economy will continue to grow at around the same rate in 2018. These forecasts bode well for the many ASX-listed companies whose future profitability is contingent on the Middle Kingdom’s continued economic strength.
Over the last five years, China’s unrivalled government stimulus program has cushioned its economy from a hard landing from the post-GFC highs when the economy was achieving double digit growth. In recent years, stimulus measures have contributed to China’s economy growing at between 6 and 8%. In contrast, the Australian and the US economies are currently growing at 1.8% and 3.1% respectively. A key component of the stimulus program are measures designed to stimulate investment in infrastructure. Infrastructure is a core component of the Chinese economy accounting for approximately 9% of China’s total GDP in 2016. We estimate infrastructure spend will continue to grow contributing a significant 10 and 15% to the nation’s GDP this year.
Aimed at ensuring China transitions to a developed economy and is positioned for sustainable long-term growth, the government is in the process of implementing its supply-side reform agenda, including measures to reduce over-capacity in various industries.
As part of these initiatives, the government is unwinding selective subsidised industries, such as steel, aluminium and coal, through reforms to state-owned enterprises (SOEs). As we have previously said, subsidised SOEs can distort markets by creating an oversupply, which puts downward pressure on prices.
Other reforms, including to stem the oversupply of property, have helped remove risk from the economy and ensure the economy is on a more stable footing. Government measures relating to the housing market have been so effective they have contributed to an undersupply of residential real estate, most notably in tier one cities such as Shanghai and Beijing.
Outlook and investment implications
As Australia’s largest trading partner and the world’s second largest economy, China’s expansion will support Australia’s economic growth. China’s supply-side reforms, which have been a major contributor to the recent spike in global commodity prices, will continue to be rolled-out over the next one-to-two years. Coupled with Chinese government infrastructure investment, we believe these reforms will fuel demand for commodities and support prices over the medium term. With commodity prices to remain buoyant, we expect Australia’s economy will continue to strengthen over the next 12-to-24 months, correlating with the broader global economic growth trend.
Numerous companies exposed to the mining sector are set to benefit from China’s continued growth. We have positioned our investment portfolio to gain exposure to this trend through positions in mining services companies such as, mining technology business Imdex (ASX: IMD) and, with a mining equipment hire business, Seven Group Holdings (ASX: SVW).