Australian investors have been told to hitch their wagon to the Chinese economy as it transitions from a manufacturing to a services economy.
Unfortunately, despite world-beating growth in recent decades, the signs show that an investment in China is not all it is cracked up to be. Like many other economies around the world, China is having trouble generating growth.
While the country still intends to post GDP growth of above 7% this year, recent actions by the central bank indicate all is not going as smoothly as it could be. This has uncomfortable implications for businesses as diverse as Rio Tinto Limited (ASX: RIO) and Amcor Limited (ASX: AMC), both of which count on growth in China to lift demand for their products.
The People's Bank of China just announced its sixth interest rate cut for the year, combined with its fourth decrease in bank reserve ratios (the amount of cash that banks must hold).
Chinese interest rates now sit at 4.35%, while the Reserve Requirement Ratio sits at 17.5%, and 17% for rural banks.
Whether lower interest rates can really kick-start the Chinese economy remains to be seen, as their effect hasn't been a magic bullet in Australia, the USA, or Europe thus far.
On the other hand, Beijing has indicated that the reduction in rates is part of the country's plan to liberalise its banking system, which is basically state-controlled unlike equivalent systems elsewhere in the world. Greater freedom in the Chinese banking system is likely to have flow through effects on both productivity and innovation in many sectors of the economy, meaning the move could be a net positive.
Many Australian companies with – or seeking to gain – exposure to China, like Treasury Wine Estates Ltd (ASX: TWE) and Retail Food Group Limited (ASX: RFG), depend on growing consumer wealth and continued strong spending behaviour to deliver growth.
Liberalising the economy is also likely to result in a rise in financial literacy levels, which is a plus for Retail Food Group's franchise model (which depends on individual entrepreneurs) and Amcor's business which also depends on product innovation to lift volume.
Over the next decade and longer, I continue to believe that China is a great opportunity for Australian companies and investors. However, with the Chinese economy slowing down despite policymakers' best efforts, I expect that growth in this region will take longer than expected to materialise for shareholders.
Investors look to have ample time to refocus their portfolio to take advantage of Chinese opportunities.
