Dan Rohr: China's economic outlook is perhaps the most important question facing investors globally today. Over the past 10 years, China has been the single largest contributor to global GDP growth. Meanwhile, China has become the world's largest buyer of everything from automobiles to airplanes to oral hygiene products.
In pondering China's long-term trajectory, it's instructive to first consider the underlying sources of the country's slowdown from the last decade's double-digit pace. Why, exactly, has growth slowed? Are the underlying causes of the slowdown likely to persist?
To answer those questions in an empirical way, we can begin by estimating the contributions of capital, labor, and productivity to China's GDP growth. What we see when we do that is that faltering productivity explains much of the economy's deceleration--about three fourths of the total. Why then is China finding productivity gains harder to come by? Largely because four sources of "easy" productivity gains are drying up. Technological progress is decelerating as firms must increasingly innovate rather than imitate. Urbanization is slowing as the rural labor surplus shrinks. Returns on capital are deteriorating as overinvestment makes good projects ever harder to find. Finally, The country's demographic window of opportunity is closing.
Looking ahead, we expect GDP growth will come under further pressure as those four sources of prior productivity gains are fully exhausted. That should cast significant doubt on consensus expectations that China can sustain anything close to the current rate of GDP growth in the medium term.
Since China is now the world's biggest buyer of a host of products, investors in stocks spanning multiple sectors will likely need to set their sights lower, too.
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