24 September 2019

Why China's slowing economic growth will help, not hurt, real asset investors.

The slow-down in the economic growth of the world’s second-largest economy has dominated headlines across the world in the recent past. Speculation on the reasons for this slow-down and the steps Beijing needs to take in order to make a course correction are rife. This speculation, of course, is fuelled predominantly by concern over what the knock-on effect of a severe turnaround in the Chinese growth story will do to the rest of the world. Investors particularly are concerned that their returns will be compromised if China’s growth continues on its current trajectory.

Real asset investors in China, however, need not hold such concerns.

The relentless ambitions of the Chinese towards the rapid yet sustainable advancement of their economy and their long-term focus is world-renowned. President Xi Jinping has made it clear that by the year 2035 he intends on China becoming a world-leader in technological innovation and over the following 15 years leading to 2050, becoming a preeminent global economic powerhouse.

In order to achieve these goals, Beijing will return to their tried and tested model of large-scale infrastructure spending in order to stimulate economic growth. Investment in infrastructure is a driving force behind returns in the real asset investment space and is a favored method of economic stimulation by the Chinese, as it has a multi-faceted economic impact.

First is the short-term stimulus of the economy through the spider-web-like monetary effect that large-infrastructure projects have on surrounding areas. Second is the long-term impact that these projects have. Improved infrastructure such as high-speed railway lines creates sustainable efficiencies in the economy through the reduction of commute times, decreasing logistics costs for businesses and the opening of previously inaccessible markets to businesses due to geographical limitations.

Despite some international concern over the return to a debt-fuelled growth model, this is a strategy that already bears Beijing’s stamp of approval. Since the beginning of 2018, the National Development and Reform Commission has approved the expenditure of over US$219 billion worth of infrastructure projects, which will be rolled out over the next 30 years.

Data coming out of China from Reuters for Q1 2019 indicates that this commitment by Beijing is not to be taken lightly. Railway expenditure was increased by 10% for the first quarter of 2019 and spending on high-speed highways was increased by 12.6% year-on-year. These figures provide confirmation that real asset investment returns, driven by infrastructure expenditure, will not be a casualty of China’s economic slowdown, and will most likely benefit from it.

One example of these mega-projects that China is investing in, is the Shanghai Urban Rail Transit Expansion, which is going to add 286km worth of railway lines to the network by 2023. In financial terms, this equates to the projected expenditure of over US$43 billion.

Investors in real assets such as industrial equipment are perfectly positioned to capitalize on the renewed vigor with which China is spending on infrastructure development. Already an asset class that provides diversification to an investment portfolio, in addition to being a hedge against inflation, these passive income investments will now be in an even better position to produce impressive returns for the investor.