As China evolves into a more mature economy, its growing middle class will develop an appetite for high quality items that will stimulate the manufacturing industry in North America and create a dramatic turning of the tables as the western world becomes the supplier, predicted Benjamin Tal, chief economist at Toronto-based CIBC World Markets Inc. at a conference in Toronto today.
“The consumer is the pioneer of the new China,” Tal told the Exchange Traded Forum, sponsored by Radius Financial Education. “The Chinese propensity to consume is higher than that of the North American teenager. China is the new market, and we expect a renaissance in the manufacturing sector in North America.”
Tal also predicted that Chinese economic growth will moderate from previously high levels of 10% to 11% a year to the still healthy 7% to 8% range.
“China will be a stabilizing force for global growth but it’s no longer a great growth story,” Tal said.
On the other hand China has several tools at its disposal to keep growth moving, that are not available to western economic leaders. For example, its debt to GDP ratio is healthy, giving its leaders room to expand government spending. Leading interest rates are around 6%, which allows room for downward adjustment if stimulation is required.
“In China, they don’t have to run anything by Congress, they just do it,” Tal says.
As China sees its economy mature, more of the wealth passes into consumer hands, Tal says. The consumer is already accounting for more than half of new economic growth, which is a bigger share than exports or infrastructure spending.
“Chinese consumers don’t want junk, they want quality products and brand names,” he says. “They’re not competing with North America in the manufacture of T-shirts, what they want is high tech stuff that is manufactured here.”
Tal said the fastest growing export to China is high-quality toys, and that’s just the beginning.
“The model is turning upside down,” he said. “American companies must restructure themselves to meet the demands of highly sophisticated consumers from China, other parts of Asia and Latin America. There will be a renaissance in manufacturing here, especially in Ontario.”
He said investors should be seeking companies in Canada and the U.S. that will be able to find a way to sell to the increasingly well-off Chinese consumers.
He expects that there will continue to be steady Chinese demand for commodities such as copper and other natural resources, but the new consumer-led growth is not as “commodity-intensive” as the infrastructure growth that has led the emergence of China until recently.
“The commodities market will not be as exciting over the next decade as it has been during the past decade,” Tal said. “In Canada there is a lot of energy capacity, which is good, but who’s going to buy it.”
He said the Americans are producing more oil than in the past, and “no longer need every drop produced in Canada.” It is essential that Canada expand its pipeline capacity to get oil to new markets, he said.
“There will continue to be opportunities in the energy business, but it will be more challenging due to increasing competition and reduced demand,” he said.
Canadians may want to reduce the exposure of their investment portfolios to commodities and to the overall Canadian market, which is heavily weighted to resources, he said.
He expects the U.S. stock market to outperform the Canadian market in 2013, as it did in 2012, as the U.S. housing market continues to recover and consumers begin to spend again. He sees investment opportunities in U.S. stocks related to housing construction and renovation, consumer spending and banks that lend to consumers.
“Canadian consumers are exhausted and won’t spend the way they used to,” Tal said. “In Canada, stick with dividend-paying stocks and REITs.”
He said “gold is nothing more than comfort food, and may go up a little but will not shine in the next five years.”