Australian Ethical International Equities Trust portfolio manager Nathan Lim said China is settling into a lower level of growth than it has historically produced.
“Clearly, the government’s attempt to rebalance its economy away from purely fixed asset investment towards services and self-consumption while reining in poor lending and environmental practices is already having an effect,” said Mr Lim.
He said the results of the Bloomberg Official Purchasing Index (PMI), which asks manufacturing managers to rate current trading conditions, is “unremarkable suggesting factories are experiencing subdued activity”.
The Bloomberg PMI index works on a scale of zero to 100, with readings above 50 indicating manufacturing is generally expanding, while readings below 50 indicate a decline.
The Bloomberg PMI chart in Australian Ethical’s Portfolio Reflections for this month shows the average rating for the index was 50.8 from May 2013 to May 2014.
“Employment conditions have also been unremarkable for some time, as seen in the employment sub-component of the China PMI,” said Mr Lim.
“In fact, conditions have weakened further in 2014 from already soft conditions last year,” he said.
Mr Lim also said there has been a sharp decline in fixed asset investment growth in 2014.
“Fixed asset investment is a particularly important indicator because of how much of China’s growth has been on the back of the building industrial capacity, infrastructure and housing right across the country,” he said.
Mr Lim said the reduction in growth in China will also have implications for Australia.
He said China exports as a percentage of Australian GDP increased from 3.4 per cent in 2009 to 6.1 per cent in 2013.
“For the March quarter, the Australian Bureau of Statistics (ABS) has noted that 80 per cent of Australia’s 1.1 per cent GDP growth in the quarter came from the mining sector,” he said.
“Naturally, not all that growth solely went to China but it is a fair assumption they took a sizeable share.”
Mr Lim said the slowing rate of consumption growth of commodities in China will affect more than just the profits of mining companies but also the miners’ economic contribution in terms of state royalty payments and well-paying jobs.
“We have to ask ourselves which other sectors in this country are going to pick up the economic slack left behind by these retreating forces?” he said.
“Our long uninterrupted economic expansion is increasingly facing headwinds that are largely out of our control.”
