What’s happening in China?
Forbidden City in Beijing. Photo: Saad Aktar. Source: Wikimedia
Anyone who wants to understand the global economy needs to have a sense of what’s happening in China. China has the second largest economy in the world–almost 2/3rds the size of the US. Last year they grew more than the US and Europe combined. They’re essentially tied with Canada as our largest merchandise trading partner, providing 15% of our imports and exports–$300 billion worth.
So what happens in China affects the United States, and what happens in the US affects China. And for the past decade China has been restructuring their economy. They are shifting from an export-oriented development model to a service-based internal orientation. And it takes longer to ramp up service production than to build factories and export cheap goods, so China’s growth has down-shifted. For thirty years China had average 10% growth per year, but since 2010 they’ve grown just a little more than half that rate.
Chinese Real GDP Growth, 1979-2015. Source: China National Statistics Bureau, Bloomberg
This is disruptive. For three decades China has pursued a path of economic liberalization within a socialist framework. The economic reforms that began during Deng Xiaoping’s regime have increased the opportunities for hundreds of millions of Chinese peasants, who often leave their ancestral homes to relocate where they can find better jobs. But when the plan changes, people have to adapt. But it’s not that easy to change the expectations of hundreds of millions of people.
As a result, China’s market has been volatile. It’s had short bursts of dramatic growth, followed by years of contraction and stagnation. The central government wants to open up the economy without giving up political control. The economy and the market are experiencing growing pains, as China’s leaders struggle to get their institutions and incentives aligned properly.
Shanghai Composite Index, 2000-2016, Log scale. Source: Bloomberg
China is too big to ignore but too young to depend too much on. They’re trying to get the benefits of free markets without the cost of political turmoil. But it’s unclear if you can have one without the other. Not matter what happens in the immediate future, China’s role in the global capital markets will only grow.
Douglas R. Tengdin, CFA
Chief Investment Officer