Recent headlines show western economies experiencing similar issues of higher interest rates, tight labour markets and potentially stickier inflation rates. Some Far East economies look to be bucking this trend in several areas. China remains one of the few economies to be cutting interest rates and experiencing longer-term changes in demographics, somewhat akin to experiences in 1980s Japan of rapid expansion and a more challenging outlook in the aftermath.
Headlines in January revealed the Chinese population declined for the first time in six decades as a result of the decades-long decline in Chinese fertility rates. Despite briefly generating headlines, the decline is potentially a longer-term issue in the pipeline. With industrial production a key component of recent economic growth for the region, the potential for a declining labour force has stoked some concern over the global supply chains which everyone depends on so heavily. Nearshoring of production away from China has become an important topic, with many discussing the potential to move production closer to home to strengthen supply chains.
Alongside potential disruption to the manufacturing sector, China’s ageing population sparks debate around public expenditure with healthcare and public pensions representing a significant burden. Reforms to the pension and healthcare system will potentially be unpopular with the population, which has already experienced a shock to the property market which many have used as a store of wealth.
The Chinese property market continues to experience difficulties, with an International Monetary Fund director highlighting the need for further action to end the crisis in the sector. Loosening effects are underway, with several potentially supportive policies coming into place that feel more desperate than anything else. The loosening of criteria by mortgage
lenders in several cities raises eyebrows, having moved the upper age bracket for mortgages to between the ages of eighty and ninety-five. With an average life expectancy in China of seventy-eight, the new mortgages act as relay loans, with the loan passing through to following generations in the event of death.
The amendments to mortgage age brackets follow a more interesting approach from property developers who began accepting wheat, grain, garlic, and peaches as down-payments in a time of extreme stress for the sector. Aside from the two more esoteric amendments to mortgage criteria, the more notable development of late comes through the cutting of mortgage rates to 4.04% for first time buyers to the lowest levels since 2019. Either way, the property crisis in the world’s second largest economy looks to be dragging in the longer term.
Even with the difficulties occurring within areas of the Chinese economy and population, the country remains attractive from an investment point of view, with some outstanding companies producing the finest quality products. Kweichow Moutai could be considered a prime example, with its symbolic white bottle and red labelled alcoholic beverage being synonymous with the premiumisation trend within the beverage industry. There are undeniably some outstanding companies within the region, potentially lending weight to the notion of focusing on the company, not the economy, when it comes to investing.
This article was taken from the February 2023 issue of Market Insight. To subscribe to our investment publications, please
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