Some say that the Shanghai composite index doesn’t affect the rest of the world. After all, it represents retail investors who haven’t yet experienced ‘if its to good to be true, it probably is!’
Any fund manager who had not hedged the bets on the obvious problems inherent to the China economy should be fired on the spot. Most did. So a meltdown in world markets is very unlikely. That’s not to say that world markets are not going to be very quiet for some time to come. And perhaps the call if increasing interest rates in 2015 was a bit premature.
But perhaps, just perhaps, we have now reached a pivotal point in China’s economy that is far less obvious.
In January 2009 US economists Reinhart and Rogoff published a paper entitled ‘ The aftermath of financial crisis’. They suggested that world GDP rates would recover within 3 years. And politicians worldwide thought they could borrow their way through the problem.
But the recovery didn’t happen. And we still don’t know why.
Jogging my memory I have come up with some personal events to demonstrate my worst-case scenario.
When I joined Rhodes University in 1998 I bought a new laptop and projector. Price R60 000 and I had to finance it all on a 5-year lease. Today I can buy the lot a whole much better for R12 000 or less, all made in China. I could view this kit as consumables. But I don’t!
My computer and cellphone were stolen in 2012. I replaced the lot and have not bought anything since. Yes, there’s new stuff around but why bother? A new iPad? What a bore!. In RSA we wait for this stuff to be stolen before we upgrade it at the expense of the insurer.
I last replaced my car in 2009. And it should go another 5 years. There’s nothing in the market that excites me enough to pay more and insure more.
I’m down to two dogs. I had four. I’m sick of paying for designer dog food and cosmetic vets. They didn’t even bite the burglars, they ran away. And they prefer leftovers anyway.
I do restaurants and shopping malls under duress. Banting at home is in thing. I drink a faction of what I did 5 years ago.
With all the bull associated with visas I haven’t bothered to holiday overseas for 4 years.
Either I’ve got old or very boring or depressed. Perhaps all three! But I’m a very different consumer to those days pre 2009. I’ve been there, done that.
My credit card reflects all this. I have not increased the limit post 2009.
I don’t think I’m alone. We all need a new consumer drug that blows the mind. And China isn’t making one because the world hasn’t invented a blockbuster I just have to get.
Then there’s another change. A decade ago Generation Y (Born 1980 -2000) took over as the family decision makers driving a wave of consumerism. But now that generation Y are starting to make their own money and families, the appetite to spend seems to be declining.
Most of our excesses are was in one way or another related to China. Are we all slowly drifting towards a far more conservative lifestyle and finding that we just don’t need all the clutter made in China?
If the consumer is changing then China must be in real trouble. The remedy of dropping interest rates may check the rot for a few days but it wont solve the fundamental problem.
Some say that China is big enough to be its own economy. I doubt it. Consumer confidence must be shattered by now.
All of this has a profound effect on RSA. After all China is our biggest trading partner and ‘digging for China’ has been supporting the RSA economy for the past decade.
And that worries me intensely.