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Just a short (and early) one this month given you’ve got more important things to worry about with your family this month and I’ll be watching the Boxing Day test match about the time I normally begin writing this.

The other persistent theme I’d like to address in the “popular press” is the “slowdown in China”.  Similar to the Europe story, this has been going on for at least 18 months now and whilst it hasn’t happened, the idea persists that with the extended weakness in Europe and the US China’s exports will suffer and hence as a result their economic growth MUST suffer.

Seems pretty obvious doesn’t it? Well let’s actually look at it

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As you can see from the chart above China is not reliant on exports for growth in any material way.  Sure they add a bit but it’s more like your teenage child’s board than your personal income, nice to have and probably valuable in the overall sense, but your life doesn’t depend on it.

In fact in the early 80’s we can see that exports were negative and apart from the late 80’s exports haven’t been a major factor either way.  Our personal anecdotal experience however has led us to believe that “made in China” is so common that exports must be a major part of their economy.

The truth is however, this drastically overestimates our own relevance.   Let’s try a simple quiz.

How much of the world’s population lives in China and India?

25%? 30%? 35%? More?

Answer – 36.5%[1] – as the two most populous nations, more than 1 in 3 people live in these two countries.  1.34 Billion in China and 1.21 Billion in India.

Who’s on 3rd?

The USA with a measly 312 million – barely 25% of the size of India and less than 4.5% of the total. 

How many of the next biggest countries do you need to match the top two?

Answer – 22.  You need to add from the USA at 3 all the way to South Africa at No 24 to get the same population as these two.

By this stage you’ve now covered nearly ¾ of the total population so each individual country becomes less and less relevant in terms of population numbers.

The point is countries this large don’t need net exports to grow their economies and can in fact be significant net importers and still grow at a good rate (just look at the US!).  Most importantly with 1.2Billion “local” potential customers, as a business you certainly don’t need to look beyond your shores to grow.  In fact a 10 block radius will probably do!

If you need a sobering example of what Chinese-type growth is consider this

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OK so China is building heaps, but what happens to commodities when they’ve finished?

The reported issue with a Chinese “slowdown” is when the construction boom comes to an end; demand for commodities will drop, leaving Australia vulnerable.  Well we covered this in June[2] but the idea still persists and I came across this graph from our friends at Citigroup which gives a great overview of the commodity life of a modern economy.

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As you can see, as economies grow (i.e. GDP per person increases[1]) the types and amounts of commodities consumed change.   All developed economies basically follow this path (as we ultimately all use and do the same things) and therefore it provides a fairly reliable predictor of future demand.   This is why the likes of Rio Tinto and BHP are investing $100+ Billion in developments in the coming years to increase supply.  Hardly something you do if it’s likely demand will reduce.

Not only will we see a further increase in demand per person for many commodities, when we consider we are talking about 1/3 of the world’s population, the actually amount “dirt” and “gas” is staggering. Whilst there is no such thing as a “certainty”, the future demand for energy and resources must be about a close to a “sure thing” as you can get.

Therefore we remain confident in the demand and therefore the opportunity.  Perhaps the medium of exchange will be different but whether it’s Euro’s, US$ or Roubles, we own what needs to be bought, whatever the medium and that is ultimately what matters.

We don’t know the pace of the change and what “hiccups” there will be along the way, but to me, the direction seems undeniable.

The future therefore will be better than the past so enjoy the festive period, safe in this knowledge and from all of us, a very Merry Christmas!

[1] http://en.wikipedia.org/wiki/List_of_countries_by_population
[2] “The Truth about China – the end of the road or only just begun?”
[3] http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita
Matt Battye

Matt Battye

CEO, Financial Adviser

Analysing what can seem to be like complex issues, Matt is effective in using analogies to better explain scenarios and truths to the rest of us. This is what Matt enjoys – educating clients on the truths and debunking the commonly held (wrong) view.

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