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Chinese pressures

It is looking as though the long awaited correction to the Chinese stock market is under way. Wednesday last week felt distinctly uncomfortable – for a while, that is. Having shed more than 70 points from the FTSE 100 in early trading as a reaction to the sell-off in China – due to the trebling of stamp duty there – we finished the day barely changed.

Our own market took heart from a firm opening on Wall Street. Much of the data coming out from the other side of the Atlantic suggests that the US consumer is not being too affected by the fall in the housing market. Economic activity may have slowed but a recession does not appear in prospect. With the good performance of corporate America keeping share valuations at manageable levels, investors feel able to ignore developments in China.

As it happens, the rise in stamp duty does not have much of an impact on the cost of share trading, particularly in the context of the profits that have been made recently. Stamp duty, which was 0.6 per cent in 1990, first reached 0.3 per cent in October 1991. Subsequent increases were the trigger for substantial falls in share prices. Back down to 0.3 per cent in 1999, it was eventually lowered to 0.1 per cent in January 2005. Last week’s increase may not be the last if shares shrug off this very clear signal from the government.

You might argue that it is in the Chinese mentality to speculate on almost anything but the reality is that demographic changes have been driving this creation of capital that has fuelled the stockmarket boom. Since 1990, the workforce in China has expanded by more than 90 million. That is about the population of Germany, the European Union’s most populous country. These workers have prospered from the rapid growth of the Chinese economy and have money to spend and to invest.

But this state of affairs will not continue indefinitely. Much was written at the end of the 1990s about the demographic timebomb that was ticking away in the developed world. The baby boomer generation would be reaching retirement age as we enter the second decade of the new millennium, with all the pressures that would apply to these economies. The situation is not that different in China.

Artificial controls on population growth have distorted the picture somewhat. Even so, it is estimated that the next 15 years will see the Chinese workforce shrink by almost as much as it has expanded during the past 17 years. This throws up an interesting problem. Much of China’s economic expansion has been predicated on an abundant supply of cheap labour and productivity has not been an issue. Soon it will be.

Does this mean we should be concerned over the outlook for capital markets in the future? These demographic changes will make a difference but quite how they will affect investors is far from certain. The biggest danger is that somehow the supply of cheap capital being generated by an increasingly wealthy developing world will dry up. This seems unlikely, even if the source of this wealth will probably change over time. The bulls continue to have globalisation and rising consumerism on their side, even if not all the problems are visible, let alone factored into the market.

Preparing some slides for this week’s AIC Roadshow in Dunblane, I realised the FTSE 250 index is up by over 178 per cent since the beginning of 2003. In contrast, the 100 index is up by just 67.6 per cent. The case for the large caps catching up – or the mid and small caps retrenching – is starting to look strong.

Brian Tora (brian.tora@centaur.co.uk) is principal of The Tora Partnership.

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