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A Paradigm Shift: Capture Opportunities in the New Chinese Economy
China’s economic foundations are shifting, and so are its investment opportunities. In this paper, we will take an in-depth look into the changes taking place in its US$13.4 trillion1 economy, exploring the underlying factors that are driving them and where they may lead the country in the future. Through it all, we will study the opportunities being created and how investors can benefit.
China’s Macro Shift: Towards a Self-Sustaining Giant
For the past 40 years, China’s economy has developed at an unprecedented rate. Since its government implemented economic reforms in 1979, significantly freeing up markets, the country has seen real annual GDP growth average 9.5%1. The World Bank has described this dramatic evolution as: “The fastest sustained expansion by a major economy in history”2. The result of this growth is clear – its US$13.4 trillion economy is now the world’s second largest1.
For most of those 40 years, however, this enlargement was mostly attributed to large-scale capital investment, financed from both international sources and substantial domestic savings. Another contributing factor was the rapid productivity increase brought about by market liberalisation, exposure to competition, and the import of efficiency-boosting technologies and processes via foreign direct investment (FDI).
The historical drivers that have contributed to China’s economic growth have diminished. In other words, China’s growth story has changed.
The Rise of Domestic Private Consumption
As China’s economic drivers have evolved, international trade and investment have taken a back seat, and private consumption is now behind the wheel. Since 2013, it has surpassed the others to become the main force of growth. Data3 shows that private consumption accounted for at least 60% of GDP growth in 11 out of the 16 quarters since 2015. For the 2017-2018 period, this figure rose to 76%, and in the first half of 2018, its share increased further to 80%. Meanwhile, China’s net trade surplus keeps falling, from an estimated 8% in 2008 to 1.3% in 2018 – less than South Korea or Germany. In fact, net trade made a negative
contribution to GDP for the 2017–2018 period.
Furthermore, as private consumption snaps up an everyhigher share of the Chinese economy, China’s international relationship dynamics have also altered – China is reducing its exposure to the world.
Indeed, the data reveals that China is becoming increasingly insular. McKinsey’s China-World Exposure Index measures the relative exposure between China and the rest of the world on three fronts – trade, technology, and capital. From 2000 to 2017, the index value representing China’s global exposure declined from 0.8 to 0.6. However, for the opposite scenario, it increased from 0.4 to 1.2 over the same period.
1 Congressional Research Service, as of June 25, 2019.
2 The World Bank, as of Apr 08, 2019.
3 McKinsey & Company, as of Jul 31, 2019.
A Paradigm Shift: Capture Opportunities in the New Chinese Economy
China’s economic foundations are shifting, and so are its investment opportunities. In this paper, we will take an in-depth look into the changes taking place in its US$13.4 trillion1 economy, exploring the underlying factors that are driving them and where they may lead the country in the future. Through it all, we will study the opportunities being created and how investors can benefit.
China’s Macro Shift: Towards a Self-Sustaining Giant
For the past 40 years, China’s economy has developed at an unprecedented rate. Since its government implemented economic reforms in 1979, significantly freeing up markets, the country has seen real annual GDP growth average 9.5%1. The World Bank has described this dramatic evolution as: “The fastest sustained expansion by a major economy in history”2. The result of this growth is clear – its US$13.4 trillion economy is now the world’s second largest1.
For most of those 40 years, however, this enlargement was mostly attributed to large-scale capital investment, financed from both international sources and substantial domestic savings. Another contributing factor was the rapid productivity increase brought about by market liberalisation, exposure to competition, and the import of efficiency-boosting technologies and processes via foreign direct investment (FDI).
The historical drivers that have contributed to China’s economic growth have diminished. In other words, China’s growth story has changed.
The Rise of Domestic Private Consumption
As China’s economic drivers have evolved, international trade and investment have taken a back seat, and private consumption is now behind the wheel. Since 2013, it has surpassed the others to become the main force of growth. Data3 shows that private consumption accounted for at least 60% of GDP growth in 11 out of the 16 quarters since 2015. For the 2017-2018 period, this figure rose to 76%, and in the first half of 2018, its share increased further to 80%. Meanwhile, China’s net trade surplus keeps falling, from an estimated 8% in 2008 to 1.3% in 2018 – less than South Korea or Germany. In fact, net trade made a negative
contribution to GDP for the 2017–2018 period.
Furthermore, as private consumption snaps up an everyhigher share of the Chinese economy, China’s international relationship dynamics have also altered – China is reducing its exposure to the world.
Indeed, the data reveals that China is becoming increasingly insular. McKinsey’s China-World Exposure Index measures the relative exposure between China and the rest of the world on three fronts – trade, technology, and capital. From 2000 to 2017, the index value representing China’s global exposure declined from 0.8 to 0.6. However, for the opposite scenario, it increased from 0.4 to 1.2 over the same period.
1 Congressional Research Service, as of June 25, 2019.
2 The World Bank, as of Apr 08, 2019.
3 McKinsey & Company, as of Jul 31, 2019.
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