Domino effect?

From the prices of commodities to how much we pay for goods in our stores and the number of tourists walking our streets, what happens in China now clearly impacts us all.

Under new leadership, however, China’s growth is slowing. So what are the risks of this slowdown?

Three of the most significant consequences could be: first, a reduction of imports from our western companies—China is likely to buy less of the industrial goods that we make; second, there could be changes to commodity prices—China may need fewer raw materials, and prices would adjust accordingly; and third, there could be changes to the valuations of direct investments we have in our pensions funds.

Looking at imports, any reduction in investment in China would lead to a slowdown in demand for goods. Supply of these to China is dominated by Japan and South Korea but Europe, through Germany, France and Italy, is also a significant supplier. The companies making these goods may clearly suffer.

Chinese demand has dominated all major commodities for several years. Any reduction in infrastructure building, leading to a slowdown in growth, would likely bring these commodity prices down. While this would improve inflation figures, global resource companies dominate our domestic stock market and their profits could be hit. Given that all their production is offshore, however, the outlook in the United Kingdom is far better than it is in Australia where the broad economy is geared significantly to this area and may be harder hit.

In the short term, this environment creates investment opportunities. While Premier Li Keqiang has not shown his full hand, he has in recent weeks indicated there is a floor below which he will not allow growth to fall, seemingly bringing to bear the old Chinese proverb, “Be not afraid of growing slowly, be afraid only of standing still.” The government has brought forward some railway and environmental projects, which will reinvigorate some of the affected markets, and there are some elements of the economy, for example property, where recovery is still supportive.

Looking further out, China should still provide opportunities. As the Chinese economy rebalances, western exports to China in consumer sectors will begin to increase in volume, and the uncertainty caused by the apparent slowdown suggests that now might be a good time to go in search of new investments. Taking a long-term view can often pay dividends.