How China Could Affect You

I read just the other day that lobster prices are rising in Canada because Chinese consumers have developed a taste for the crustacean.

It turns out that Chinese consumers’ almost insatiable demand for the shellfish, which turns a “lucky” red colour when cooked, coupled with a severe supply shortage in Australia has pushed up the price of Canadian claw and knuckle meat by around a third compared to a year ago.

But that’s not all.

It is reckoned that by 2030, which is only 15 years away, the number of middle-class consumers in China could surge to one billion from about 150 million today.

How on earth will the world cope when seven times as many affluent Chinese start to compete for not just lobsters but other food stuff, commodities such as soya, rubber and wheat, access to travel and quality education outside of their own country?

For many years, China has been the main driver of global deflation, thanks to low labour cost in the Middle Kingdom. But things have changed.

China is no longer the sweatshop of the world, and nor does it want to be seen as such. Consequently, all those cheap garments that we have been accustomed to buying in our shops will probably slowly creep up in price.

It could simply be a matter of time before we start talking about inflation rather than deflation or disinflation. After all, when too much money starts to chase a limited supply of good, then prices could rise.

There are some uncanny similarities between that and the rise in price of lobsters when millions of hungry Chinese diners chase after a limited number of available shellfish.

The rise of the middle class in the Middle Kingdom is the ambition of President Xi Jinping. Many companies outside of China were also banking on servicing the growing middle class.

But there has been a slight setback to the President’s ambitious plan.

The Chinese government had hoped for a much-need feel-good boost, as a result of rising stock market prices. Even the state-owned media was promoting the benefits of stock-market investing. But not anymore.

It seems that things have gone slightly wrong for President Xi. The feel-good factor has evaporated faster than the share price of Chinese penny-stocks. Some believe that it could be a while before Chinese consumers regain their swagger.

But the economic numbers would appear to tell a different story.

Around 60% of China’s economy is now driven by consumer spending. That might be lower than, say, the UK or the US economies. But it is nevertheless a significant driver of economic growth, which is unlikely to be derailed simply because a hundred million or so Chinese retail investors have had their fingers burnt by punting too recklessly on the stock market.

China’s economy is still expected to grow at around 7% this year. Even if it doesn’t quite make the government’s target, a more moderate growth rate is only to be expected as China moves from being a command-led economy to one that is more market-driven.

From a Singapore retail investor’s perspective, the Chinese stock market crash should be seen as an event that is isolated to China. Interestingly, the crash only had a muted impact on stock markets elsewhere in the world.

Perhaps that is because the latest surge and plunge in China’s market is not the first time that it has overacted, in either direction. The Chinese stock market, rather than being a barometer of its economy should be seen as a sphygmomanometer of the Chinese investors, which swing from hypertensive to hypotensive at the blink of an eye.

We, Singapore retail investors, should not be overly concerned, even if the companies we invest in are exposed to the Chinese economy.

The likes of Hongkong Land (SGX: H78), which generates over three-quarters of revenues from Greater China should continue to benefit from demand for prime property. Global Logistics Properties (SGX: MC0), which has two-thirds of its assets in China should continue to gain from greater acceptance of e-commerce. Shopping mall operators such as Mapletree Greater China Commercial Trust (SGX: RW0U) could also do well, as Chinese consumers embrace the shopping culture.

Investors should always try to focus on the medium to long term rather than what might happen to, say, China’s stock market or China’s currency on a day-to-day basis.

Over the long term, we are likely to see a billion or so new consumers on the market competing for the same goods and services that we buy today. That is a good thing. But it is also likely to be a cause for inflation, which means that the best place for our long-term savings should always be in inflation-beating assets.

A version of this article first appeared in the Independent on Sunday.

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