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Global Growth Built on Shaky Foundations

It’s no secret that the Chinese economy, the world’s second largest, has been one of the key engines of global growth the past few years.

In 2013, China’s economy grew by 7.7%. And although this rate has slowed, it’s still by far the highest growth rate of any major economy.

This speedy growth has primarily been driven by the largest commercial- and real estate investment-spending boom that the world has ever seen.

According to The Skyscraper Center, there are currently 74 buildings under construction or on hold in China that exceed 300 meters in planned height. To put this number into perspective, there are only 20 such buildings in the United States that surpass this height… unfinished or completed!

As John Foley, Reuters Breakingviews’ China editor, notes, “Our worry has been that buildings have been going up too fast, often in the wrong places, and in many cases are too reliant on very short-term financing. Some are even falling into disrepair before anyone has even moved in. So the question for growth is… how long can this last?”

Indeed, China’s supernormal GDP growth has a cost, and it may be time for China to pay the piper.

You see, China’s fixed investment boom is being fueled by a massive credit expansion that’s reminiscent of the United States’ credit boom during the housing bubble.

And now, cracks in China’s banking system have started to materialize.

There is an ominous similarity between the current situation in China and that of the United States after the subprime mortgage market started to implode. Remember U.S. policymakers claiming that “subprime is contained” back in 2007?

Rest assured, the situation in China is going to get much worse before it gets better, and this has significant global implications.

That’s why we, as dividend and income investors, have to have an investment plan and stay disciplined.

You can start by making sure you aren’t overexposed to high-beta stocks.

Safe investing,

Dividends & Income Research Team