April 26, 2019

Will China be ‘home’ to the
next Black Swan event?

  • Tweet
  • Share on LinkedIn
  • Share via email
  • Print
  • Download

April 26, 2019

By Brendan Mulhern, Global Strategist at Newton, a BNY Mellon company

Renewed China stimulus has been one factor keeping capital markets sanguine so far this year. But what if we told you China’s growth dynamic may not be all it seems?

  • China’s progress in rebalancing towards a consumer-led economy is patchy at best
  • Statistics still point to the property market as a lynchpin of the Chinese economy
  • Investors hoping China will reaccelerate global growth, should be aware of its shaky foundations

As a share of GDP, China’s investment spending reached unprecedented levels in the years leading up to and following the global financial crisis. This was, of course, unsustainable over the longer term and it was widely recognized by China’s policymakers that the economy needed to be ‘rebalanced’, with domestic consumption accounting for a larger share of output while overall investment declined.

This has been commonly depicted as a rebalancing away from the ‘Old Economy’ (secondary industries such as manufacturing and oil refining plus property), to the ‘New Economy’ (service industries such as computer services and tourism). The chart below shows how China’s rapid economic growth prior to the global financial crisis was driven by the ‘Old Economy’.

If China’s economy was to be rebalanced then it was inevitable that economic growth would slow, which the chart above clearly shows to be the case, particularly since 2012.

However, what has not been discussed quite so frequently is the fact that whenever policymakers have needed to stimulate the economy, it has tended to be the constituents of the ‘Old Economy’ which are ‘juiced up’. The chart above shows how the acceleration of the Chinese economy between 2009-11 and 2016-17 was mainly driven by the ‘Old Economy’.

Looking deeper still, within the ‘Old Economy’, it is the property sector that drives the big swings in China’s economic growth. Property accounts for 86% of household wealth, while 87% of urban households own their own property and 27% own at least one empty investment property. Around 65% of loans are backed by property collateral and the government funds 60% of its spending through land sales, which depend in turn on rising prices for empty investment properties.1

So what’s the implication?

Combined, the statistics point to the property market as the lynchpin of the Chinese economy. For all the talk of a consumer-led rebalancing, if Chinese monetary stimulus is going to help drive a reacceleration of global growth this year it won’t be via the Chinese consumer, but instead, through China’s property market. And we all know what happened the last time a superpower’s property market was allowed to dominate to such an extent…

Related Investment Strategy >


Gross Domestic Product (GDP) is a broad measurement of a nation's overall economic activity. Primary Industry – extraction of raw materials – mining, fishing and agriculture. Secondary Industry – production of finished goods, e.g. factories making toys, cars, food, and clothes. Tertiary Industry – provision of intangible goods and services to consumers, e.g. retail, tourism, banking, entertainment and I.T. services. Financial Services Industry – providers of financial services, e.g. banks, investment banks, insurance companies, credit card companies and stock brokerages.

All investments involve risk, including the possible loss of principal. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Certain information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Investment Adviser, Inc., Newton and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon.