China is on the verge of reaching its so-called Lewis Turning Point, as China’s work force as share of the population has reached a peak and cheap supply of labour from the countryside is running dry. The economy will therefore need to find new engines of growth, which will slow down to 4 or 5% in the years to come, expects Martyn Hole, a European equity manager for Capital Group.
And that’s where the macroeconomic risk kicks in, says Hole. “If the Chinese government decides that’s too low and they keep pushing the gas pedal, you will see a financial crisis in china at some point.”
Hole went on sketching a gloomy prospect for the world economy. “This would be very negative for the whole world as it could trigger a devaluation of the currency leading to a global deflationary shock.”
Fabrizio Quirighetti, head of multi-asset investments at the Swiss boutique manager Syz Asset Management, agreed, arguing that China’s fast-growing debt pile makes it vulnerable to a financial shock. “Credit growth is much higher than GDP growth.”
The fund managers even fell short of mentioning the ‘conspicuous’ boom in the Chinese mainland equity market (see chart above), which only seems to exacerbate risks for investors in the country. Half of the delegates at the event have a significant strategic exposure to Chinese equities, which shows that China’s woes have indeed now become a global affair.
Andrew Wilmont, a European high yield manager for Neuberger Berman, took a completely different line, putting things in perspective. “Frankly, I don’t know where the next crisis will be coming from as we usually don’t see a crisis coming in advance. That’s why it becomes a crisis,” he said.
Click here to see a full breakdown of the delegate voting results from Expert Investor Netherlands.
And click here to see a slideshow of photos taken during the event.