Morningstar Advisor - December/January 2012 - (Page 37)

increase consumption’s share of GDP to 50% by the end of the decade. There are two ways to achieve this rebalancing, of course: 1) stronger growth in consumer spending or 2) weaker growth in fixed-asset investment. Unfortunately, the track record established by previous booms suggests that the latter outcome is more likely than the former. Consider the average GCF growth turned in by Japan, Korea, and Taiwan in the decade after each country’s investment boom: 1.2%, 2.4%, and 5.9%, respectively (Exhibit 6). If China were to achieve the average of those three (about 3%) in its own postboom decade and household consumption continued to expand at the rate it has in the past decade (7%), total GDP would grow at 4.8%, well below the 10.5% it averaged in the 2000s. Even if consumption were to expand at 12% annually, a level it achieved not once in the past decade, GDP would grow at 7.5%—stellar by developed-markets standards, but below what Chinese citizens and global investors have come to expect. Notably, in the case of Japan, Korea, and Taiwan, GCF growth postboom was inversely related to the size of the boom. Japan and Korea had larger booms (GCF averaged a 37% share of GDP in the boom decade), leading to weaker GCF growth postboom. Taiwan had a relatively smaller boom (31% share of GDP) and saw fairly robust GCF growth postboom. With this in mind, it seems reasonable to believe that, because China’s investment boom has been both longer and stronger than its antecedents, its postboom decade will require more-modest additions to the capital stock than the cases of Japan, Korea, or Taiwan. This suggests even 3% GCF growth would be a fairly rosy outcome by historical standards. Assuming instead 1% GCF growth and 7% consumption growth would put GDP growth at 3.8%—a potentially troubling outcome not only for China but also for the global economy as a whole. K Daniel Rohr, CFA, is a senior equity analyst with Morningstar. Exhibit 5 Living in the City: Despite decades of growth, only 50% of China’s residents live in urban areas—or so says the Chinese government. Urban population (millions) % of total population 700 70 600 60 500 50 400 40 300 30 200 20 100 10 80 Source: NBS 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Exhibit 6 Not a Good Sign: Previous booms show that GCF growth plummets in the decade after the booms. For China’s GDP growth to remain anywhere near its current rate, consumption would have to expand at unprecedented levels. Gross Capital Formation Growth: Boom and Postboom (Annual Real Terms) Boom era Postboom decade 15% 12 9 6 3 Japan Source: NBS Korea Taiwan China MorningstarAdvisor.com 37 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012