Friday, September 8, 2017

Economics: China - Viva La Transformation

(Drivebycuriosity) - There is a lot skepticism about China. For years the China skeptics - including New York Times columnist Paul Krugman - have been predicting that the country`s rapid growth will come to a sudden end. It didn´t happen, China is still maintaining a growth rate of more than 6% p.a. But global investors are still wary and they now hold a decade-low underweight position in China equities, reports investment bank Morgan Stanley (morgan). I think that the China skepticism is unwarranted and the huge country will continue her swift ascent for many years.

China is still at the begin of a secular catching-up process, which is fueled by extreme income & wealth differences to the US and other Western nation values. In 2016 China had about $8,123 income per capita, the US number was $57,466 (worldbank).  China is following other countries which had managed to catch up to the leading economies before  (to UK before 1920, since then to the US, graph below) 

It is highly likely that China will continue her catching-up-process for many years. The country has a huge natural resource which is fueling the perpetual growth - a gigantic amount of human capital: 1.3 billion people who are intelligent, who work hard and who save money to achieve a better life. According to the World Bank the Chinese save more than 40% of their income, the American just around 20% (worldbank). High savings (capital accumulation) and a good education lay the fundamentals for sustainable economic growth. Wikipedia counted in 2014 already "2,236 colleges and universities, with over 20 million students enrolled in mainland China" (wikipedia). This fast expanding knowledge will drive science & innovations in the future and foster economic growth.

China has still a communist government but Beijing had conducted many reforms in the recent decades. Today the country has a lot of capitalist segments like stock markets, special economic zones and many private companies (bloomberg). The differences to the US system - where banks & industries are regulated and airports, harbors, railroads, subways and more are still public - are shrinking.

China`s growth is boosted by a rapid transformation process.  For decades the country has been changing from an agricultural economy into an industrial economy, following the role models of the US, Japan, South Korea and many other countries. Now China is entering another stage of the transformation process: Changing from an industrial country - which relies on exports - into a modern economy like the US which is dominated by services and focuses mostly on the domestic market.

For years imports & retail sales have been growing faster than exports & industrial production. Therefore a growing part of the national production is consumed in China, which reduces the country´s dependence from global markets.


                                           Greatest Migration In Human History

The transformation process is fueled by the rapid urbanization: Since the late 1980s several hundred million people have been moving from rural areas into the big cities, the greatest migration in human history. By the end of 2015, 56% of the total population lived in urban areas, a dramatic increase from 26% in 1990 (wikipedia ). The huge country now has more than 100 cities of over 1 million residents, a number that is likely to double in the next decade, writes the Guardian (theguardian).

The migration process into the mega cities rises productivity and incomes of the whole nation. History shows "that clusters of talented and ambitious people increase one another’s productivity and the productivity of the broader community, spurring economic growth", explains city lab, a think tank (citylab). "80% of economic output originates in cities: urbanization is the engine of economic growth", says the project syndicate, another think tank (project-syndicate). The migration process fosters a fast rising affluent middle class, driving consumer spending & economic growth.

China also is benefiting from the fact that her infrastructure (trains, subways, harbors, airports) are much newer and therefore much more modern than US. Beijing is pumping trillions into airports, railroads and other infrastructure, the country has already some of the fastest trains of the world.

It suppose that China´s catching process also benefits from historical lessons & the experience made by other countries. China does not need to reply the mistakes of other countries and is learning from them. Beijing`s central bank is doing a good job by avoiding inflation & recessions. China´s transformation also gains from technological progress: Rapid advances in software & Internet (including cloud computing), robotics, 3D printing, nanotechnology, genetic engineering and other technologies are all lifting the productivity of the economy.

The Internet - including the "cloud" - increases the flow of information and reduces the cost of data. New ideas can spread faster, encouraging discoveries and inventions and boost the technological progress & China`s transformation. A large part of the population uses already smartphones, tablets and other devices which allow them permanent access to the world wide web. These high tech devices help them to organize shopping, leisure time, traveling, dating, eating out and more and are so rising productivity & economic growth. Companies are using cloud services for organizing. China has already huge Internet  companies like Alibaba, Tencent & Baidu which are growing fast and are becoming global power houses. The government - and companies like Baidu - are investing massively into artificial intelligence which will boost transformation & economic growth for years to come. I suppose China`s rise will also foster the global economy and will make it more diversified & crisis-proof.

Viva la transformation.  

PS For illustration I used an image from the China Fashion Week in Bejing 2017 displaying creations by designer Tom Dong (xinhuanet).

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