CIARAN RYAN: For decades China has been the driving force behind global economic growth. Since China began to open and reform its economy in 1978, GDP growth has averaged about 9% a year, and more than 800 million people have lifted themselves out of poverty.

However, concerns have started to surface regarding the sustainability of this blistering growth rate in China, especially considering the high levels of debt and its deteriorating demographics. In 2022, China recorded its first population drop in six decades, surrendering its title as the world’s most populous country to India. So where does China go from here and are these concerns about its slowing growth rate warranted?

To help us answer these questions, we are joined by Adriaan Pask, chief investment officer at PSG Wealth. Hi, Adriaan, good to talk to you again. Can you contextualise China’s investment case and why it’s such a key player in the global economy?

ADRIAAN PASK: Hi, Ciaran. Yes, I think the original investment thesis was very much centred around significant population growth and, aligned with that, significant urbanisation, GDP per capital growth, consumers getting wealthier, and a lot of consumer spending taking place. That money typically finds its way into various countries around the globe. But more importantly, because you see all this urbanisation, a lot of property development also means that there’s additional demand for raw materials.

So countries like South Africa would’ve benefitted greatly from those higher commodity prices, and those have been some of the key things that also happened within the context that the government adjusted its strategy, which was previously quite focused on government spending on that same infrastructure, to one more oriented towards consumer spending – which was deemed to be more sustainable over time.

CIARAN RYAN: I spoke about China’s slowing growth rate and falling population in the intro there. Are these a threat to China’s investment case going forward? And are there any other risks that could be a factor here?

ADRIAAN PASK: Yes, absolutely. I think look at the key risks for China – firstly, debt. The country’s indebted. We see a lot of debt around the globe now, especially when you look at government debt; [it’s] purely a function of what we saw during Covid, a lot of support required to keep the economies afloat. We’ve discussed this at length before.

But also, what’s happening in China specifically is with all the development that’s taken place for urbanisation, the property sector has grown significantly, and the property sector constitutes roughly 25% of Chinese GDP. But remember, property companies are typically quite leveraged businesses, so if you overleverage and you run into a risk where there’s a lack of supply or developmental issues – as we’ve seen in China’s case more recently – that can introduce quite a bit of risk.

You can see it in the corporate debt level. So corporate debt-to-GDP, which largely sits in that property space, is well over 150% of GDP, which is unique for that level of leverage in the private sector.

And then, in terms of the demographics, because it underpinned the initial investment case that said there’s a lot of population growth and a lot of spending, all of a sudden, we see the beginning of what’s likely to be a longer-term decline in population, which means that everybody’s now doubting whether this urbanisation will sustain itself – which seems unlikely – and whether the consumer growth can continue to happen when you have the backdrop of a lot of the existing wealth being under pressure in China if the property market is under pressure.

So that’s going to put pressure on the consumer, not just in terms of the headcount of the number of consumers in China, but also around how much disposable income they have to propel consumer spending.

CIARAN RYAN: So it does seem that there are opportunities and risks. You’ve certainly mentioned a few of those, and identifying those risks is the easy part. What could be the impact of these risks on China’s investment case going forward?

ADRIAAN PASK: That’s the tricky part, because I think the risks are well known at this point; the things that I’ve mentioned before. But I think what’s important, especially with something like property in China, is quite important from a systems perspective … [the risk] is so well integrated into the economy, into the wealth system with households, you’ve got to think where ultimately the second-round effect risks are going to land.

What we’ve seen so far is a decline in Chinese equities, which have already fallen around 40% from previous peaks.

Iron ore has fallen a lot. The real estate sector has adjusted downwards as well.

But there are still certain areas where it’s likely that the market hasn’t sufficiently reacted. Some of the commodity prices seem quite elevated still, given the prevailing risk. So something like iron ore, for example, still seems quite elevated, given the challenges that China’s experiencing at the moment.

You’ve got to wonder where these debt issues are going to land eventually. Even if there is support from the government in the form of stimulus, ultimately these debts need to be repaid.

So, if it’s only a liquidity crisis – in terms of the development companies not having sufficient cash flow to complete their projects – then the government can help with that transition to make sure that they can complete the projects.

On the other hand, if there’s complete oversupply and they can’t bridge their liquidity issues, you run into a very complex set of problems around social unrest, erosion of wealth, and private wealth.

So I think the market seems to say there are risks, but let’s be hopeful that Chinese authorities intervene. And that’s a bit of a wild card.

Chinese authorities tend to be quite unpredictable in nature.

Alongside that, the investment case around any population increase or decrease is something that trickles over very slowly, and that’s something that affects the investment case over multiple decades. So it’s very, very difficult to get a proper handle on it.

I think the last important point to mention concerns the data issues that we have currently.

You can hear there’s a lot of uncertainty around China now, and typically what we like to do when we are uncertain is we try to do more research. But the problem is, if the data isn’t forthcoming, it also sort of ties your hands a bit in terms of getting more comfort around some of these complex problems.

I think that’s not an issue that just 

PSG is grappling with. I think it’s an issue that affects investors globally – the issue around the availability of data coming out of China. They seem to be squeezing that data as well, because some of it is not very flattering and the release of data is becoming less [frequent].

CIARAN RYAN: Yes, there have been concerns about China’s reporting in terms of accounting procedures that would be generally accepted in the US or according to IFRS, International Financial Reporting Standards, for the rest of the world. They don’t seem to be conforming to those standards or to [some of] the demographic figures that come out and economic growth figures.

What is happening at the governmental level in China to counter some of these risks that we’ve been talking about?

ADRIAAN PASK: Well, like I said, the demographics is a difficult one, because that’s a multi-decade problem.

There aren’t any quick fixes because what we are talking about effectively, when it comes down to very rudimentary terms, is that the birth rate in China is not keeping pace with the mortality rate. People are passing away more quickly than new people are being born. That’s going to put a damper on productivity coming through the system.

At the same time, as people age, it becomes more costly to make sure that they’re okay from a social perspective. They need healthcare and all those kinds of things. So I think that’s a very complex problem.

Unfortunately, they don’t have a very good track record in this space, in terms of planning appropriately for what type of regulations can have what kind of impact long term. So the demographics are something to keep a very close eye on.

I think that the property one is very, very difficult because, ultimately, it could be solved by supporting these property developers with funding so that they can complete their projects and restore confidence in the sector. But also keep in mind that the government debt is already quite stretched.

Essentially it feels like kicking the can down the road a bit, which might be sufficient for this year – but how is the problem going to be solved more sustainably? That needs to come through growth. And the normal levers for growth in China have been government spending through infrastructure spend, as I mentioned before, which is not aligned with the new strategy.

And the other source of growth for GDP has historically been exports. And those are also now under pressure.

So they’re going to have to figure out how to propel growth to essentially grow themselves into a situation where the debt burden becomes more manageable. Exports are a huge component of that.

I think they’re going to have to relook at some of their trade tensions and the partnerships they have. On the consumer spending side, they’re going to have to restore confidence in the economy, and the only way that you can do that is by providing better stimulus.

So let’s hope sanity prevails. To date, I think it’s been disappointing in terms of the stimulus that we’ve seen from the government – but you can understand why, given the debt issues they face.

CIARAN RYAN: Adriaan Pask is chief investment officer at PSG Wealth. Thanks very much for joining us, Adriaan.

ADRIAAN PASK: Thanks so much Ciaran. Appreciate it.

Podcast: Has China’s longer-term economic outlook been compromised