A decade of manufacturing and export-fueled growth in China has gotten us quite accustomed to seeing China in that light. We’ve gotten used to looking at manufacturing and trade indicators for suggestions about the economy’s future. This approach needs to change. The economy is transitioning. It’s running—or at least trying to run—on a different growth path.
Growth in China has been driven by demand abroad for a long time. But its growth will now be fueled by the rise in consumption back home—a shift from supply to demand. China is shifting from an export-driven, low-cost manufacturing hub to a consumption-led economy. Consequently, growth drivers are changing too.
Growth drivers for the returns investors reaped from the iShares China Large-Cap ETF (FXI) or the Direxion Daily FTSE China Bull 3X ETF (YINN) in 2010–11 will differ in the next Chinese stock market bull run. Manufacturing, industrial production, and industrial credit were the key drivers back then. China was in a rapid industrialization phase. The stock market returns and double-digit economic growth of that period were a result of China’s huge role in world trade.
China’s early 2015 stock market rally was nothing short of a bubble. Valuations were just too high to support the fundamentals, and financial leverage soared to unprecedented levels. The August 2015 crash came as no surprise.
The next rally, however, should be driven by drivers such as consumer spending, consumer credit, and a rise in wages. Though economic forecasts remain on the downside for the near future, over the longer term, the shift in growth drivers may put this emerging market (EEM)(VWO) in a brighter light. After all, you can neither overlook nor underestimate China’s relevance in the world (VEU) economy.
In this series, we’ll give you some insight into what’s currently changing in China. We’ll also shed light on specific growth drivers that should become extremely relevant, given China’s shifting growth model.