China: Hot ... or Not?

Many observers see China as a hotspot and as far as growth prospects in agri-food markets go, we also like what we see. While that’s true, we’re not going to say the country’s economic future is without risk.

The fact is, China’s Gross Domestic Product (GDP) – a figure that can still impress – doesn’t provide the whole story of their economy.

I often hear that painting a positive picture of China’s economy downplays the risks–that a Chinese financial crisis would have significant negative repercussions for global markets. The theme varies, but the basic argument is the following:

Debt in China has grown at an unsustainable pace to be able to build cities, plants and highly modern transportation infrastructures. Some of the explosion in credit has been driven by a shadow lending sector that is lightly regulated. Even the most stable state-owned financial institutions now see their portfolio crippled with highly uncertain investment projects. A collapse of the shadow lending sector could trigger domino effects that may lead to a credit crunch.

And there would be negative implications for all groups in the economy, including consumers.

A slowdown in the rate of China’s economic growth is almost inevitable in the near future, perhaps because of smaller investments. And though observers agree that more consumption is needed to replace the emphasis on investments underscoring previous growth rates, that consumption will be tied closely to Chinese wages. A decline in the size of the active population as a result of aging will pressure Chinese businesses to increase productivity to remain competitive. A shrinking labour force and higher productivity usually lift wages in the economy.

The bottom line however, is that we expect an overall shift away from investment towards consumption to be positive for agri-food markets.As our recent FCC economic spotlight suggests, we believe economic conditions in China will sustain a strong demand for food.Lower investment and higher wages may hinder the rate of economic expansion as measured by GDP, but it should also be accompanied by a boost to household income.

Household spending is what really matters in healthy agri-food export markets.

J.P. Gervais, Chief Agricultural Economist