Thursday, February 15, 2018

Economics: China - Happy Year Of The Dog

(Drivebycuriosity) - The Chinese are celebrating their New Year. I think China`s success story will continue in the beginning lunar "Year of the Dog" and the years beyond.

There are at least seven strong reasons why China will stay in a high growth mode for years to come:

1. The huge country is still driven by a secular catching-up process which is fueled by the extreme income & wealth differences to the US and other Western nation values. In 2017 China had about $16,600 income per capita, the US number was $59,500 (cia.gov).  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) .




2. China has a huge natural resource which is fueling the perpetual economic 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.

3. China has still a communist government but Beijing had been easing her grip on the economy and 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.

4. China is rapidly changing & modernizing. For decades the huge country has been transforming 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. Many peasants are moving to the huge metropolitan centers which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, giving consumer spending a boost as the strong retail sales (growth rates around 10%) demonstrate.

5. 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.

6. China leads the world in infrastructure investment, observes consulting company McKinsey (mckinsey). Beijing is investing massively into expressway, rails, airports, electricity, telecommunications & more. The government earmarked $1 T for the "New Silk Road" project, also known as "One Belt, One Road". China intends to create a network of land and maritime routes to improve the flow of goods and access to Central Asia, Europe and the Middle East.

7. China´s growth gets a lot tailwinds from the 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. 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.

 Happy New Year! 

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