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By Jeremy Glaser | 11-02-2012 11:00 AM

Has China Hit Its Growth Limit?

China's historical growth drivers have started to plateau, but many untapped industries--particularly in the services sector--are set to take the lead, says Seafarer's Andrew Foster.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Is China’s growth poised to radically slow down? I'm here today with Andrew Foster, the chief investment officer of Seafarer Capital Partners, to take a look at Chinese growth and see how investors can best access the market. Andrew, thanks for joining me today.

Andrew Foster: It's my pleasure, Jeremy.

Glaser: So to start off, can you give us just your overall take on what’s happening in China right now from a macroeconomic standpoint?

Foster: Yes, China’s growth has been slowing, and it's been slowing for few years now. It's definitely the case that China is struggling in the current global environment with the impact of its export sector declining particularly because of the woes that are taking place in Europe. But I think what’s also happening in China at the same time is the economy is going through a tremendous amount of transition. The drivers of its growth in the past have reached some limits in their ability to propel the economy further. I think the internal baton, if you will, of the sectors and industries that are driving growth within China are changing, and that is leading to some uncertainty, doubt, and frankly slower growth amid transition.

Glaser: So what are some of those biggest drivers of the economy right now?

Foster: I think the unsung driver of the economy is the tertiary sector--a fancy word for the services sector or the supporting sectors within China. If you look at China’s growth over the last eight or nine years or so, despite all the headlines we read over physical infrastructure and residential property and construction and exports leading China’s growth, actually the fastest-growing sector has been the domestic-services sector. It's outpaced the other sectors by not a whole lot, but by a little bit. It's been growing around 12% over the last eight, nine years, whereas the other sectors that you hear so much about are growing slightly slower than that around the 11%-11.5% range, and consequently the services sector is becoming the biggest of driver of growth over time. I very much expect this trend to continue, and I think that the Chinese services sector is really woefully underdeveloped internally within China. By my own estimates, the private services sector accounts for less than a third of China’s GDP right now, and I think it's going to grow quite considerably. Our own services sector in the U.S., the private services sector accounts for two thirds of GDP, and I think China will look more like the U.S. over the next few decades.

Glaser: So, what are some of the biggest risks to Chinese growth then? Is it a real estate bubble? Is it political risk? What are the bigger problems that you see on the horizon?

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