Nearly every quarter since China embarked on its journey toward capitalism, fears about its rate of economic expansion have been raised. Such was the case again earlier this week, when China said its economy grew at its fastest pace in a decade. Much hangs in the balance if the country can't control its growth, as one investment bank indicated after China's announcement that its gross domestic product advanced at an 11.3% annual rate in the last quarter. "China urgently needs to rebalance the economy, cooling down investment and relying less on exports and more on domestic consumption," Lehman Brothers said. However, as has been the case in the past, the worries might well be overdone. "The headlines look quite alarmist, but the reality is that China's a big ship, and it moves very slowly," says Julian Thompson, a portfolio manager at RiverSource Emerging Markets Fund, with about $520 million in assets. Thompson points out that with China there has been little correlation between GDP growth and investment returns. "If you look at the Chinese economy from the 10-year period ending in 2005, it had the fastest growth rate in the world," he says. But during the same period, the Chinese stock market has delivered a negative 3% annualized return. Cheap manufacturing was once the key to China's expansion and economic health, but Thompson says the new barometer will be the emerging consumer economy and whether it will be strong enough to bring the country's growth in for a soft landing. Logic dictates that some sort of slowdown must happen, says Brian Fabbri, chief economist at BNP Paribas. "Anything that grows as rapidly as the Chinese economy has been growing is subject to some serious reversals," he says. "To not expect some significant reversals is foolish and foolhardy.
So when Beijing finally does take measures to hit the brakes, hopefully consumer spending will be there to ease the pain. "When an economy is a little bit out of balance, when most of the growth takes place on the investment side with limited growth in consumer spending, in the history of Western economies, we have seen that those reversals have been more serious," Fabbri says.
"The idea of domestic consumption picking up is becoming more realistic as more evidence comes out that Chinese consumers are just like consumers anywhere else," says Thompson. "Given access to credit, we have seen that they will consume."