Is China’s economy really dead; or is it just suffering a bad hangover?

Over the Christmas break, my family and I visited the island of Hokkaido in Japan and we skied at a lovely little resort called Tomamu. One evening, we were fortunate enough to visit a village made entirely from ice—it was truly a remarkable sight.

On the short bus trip to the village, we passed at least three major tourist resorts. They were huge complexes of at least 500-plus room hotels and facilities. As we drove past each one, I noticed something was amiss… not a single light was on, and the main entrance was completely covered in snow up to the roofline, which made access to the building impossible. These buildings would have been no more than 30 years old, yet they were completely abandoned.

During the 1980s, Japan went through mind-boggling economic expansion. Along the way, a number of industry sectors—and people, of course—benefited from those extremely prosperous times. The skiing industry was one of these beneficiaries; there was spectacular growth in popularity of the sport and during this time, there was a frenzied building boom. Accommodation and resorts popped up all over the countryside; close to 500 in total.

However, as the economy inevitably cooled and spending habits returned to normal levels, there was a large amount of excess capacity. Buildings like the ones I saw were no longer financially viable, and simply closed down.

Today, there is much rhetoric about China and concerns about its economy, but the issues that China is facing have many similarities to what occurred in Japan.

To give you some idea of China’s voracious level of consumption, in the last three years it has used more cement than the US has consumed in 100 years!

Now one might ask what was the rush? Sometimes when demand is hasty and excessive, they create distortions in the supply-demand system, resulting in excess capacity once things normalise (and as what goes up must come down, they always do).

Like Japan, China will no doubt experience excess capacity from the boom of the ‘go-go’ years, and this overhang will be difficult to handle through the transition period.

And like a number of its boom-bust predecessors, I believe China’s GDP rates will fall over time from 6.8% to around 1–3% p.a. This will bring them into line with most modern societies, with Australia presently at 2.5%, the USA at 2.1% and the EU at 1.6%.

One thing we can be sure of is these transitions are never smooth; everybody will want the problems created by the fallout to be fixed in days or weeks rather than years.

Please also remember that before embarking on any investment decision, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.