As China sees in the Year of the Snake, James Weir, co-manager of the Guinness China & Hong Kong and Guinness Asia Focus funds, examines the region's ongoing potential.
China’s transformation from an agrarian society to the second biggest economy in the world has been one of the great economic stories of recent decades. Arguably, China is just reclaiming its rightful place having historically been one of the largest economies in the world.
China’s success has created tremendous wealth, and its middle class spending power is growing rapidly.
There are concerns that China’s economic model has passed its zenith and that its growth must come back down to earth. Critics accuse China of over-reliance on fixed capital formation, while the aspirations of its people to property ownership and higher living standards have languished.
Focus and discipline 'key' in Year of the Snak
But a huge country of 1.3 billion people does not lend itself to simplistic analysis, nor do any of the criticisms I have read about China preclude finding good investment opportunities there.
It is clear that the nature and speed of economic growth in China is changing, but it is still astronomical by the standards of the current world economy. China’s economy and society are at a turning point, but it is not a given that growth will slow precipitately, or that social unrest is likely.
China’s growth since 1979 has been founded on its ‘demographic dividend’. That is, more people coming of working age and moving from rural underemployment to higher value-added activities in urban areas.
This dividend is nearly, but not entirely, paid out, and there is evidence that wage costs are rising in urban manufacturing occupations. But China’s not running out of workers, as some critics might have you believe.
Instead, people’s aspirations have risen, and the government wants to meet those aspirations by mandating wage increases in those urban manufacturing jobs. These are the people most likely to move up into China’s middle class and help to boost consumption demand. So the policy focus is on growth in per capita GDP, rather than just pushing the overall growth in GDP.
Some other countries, most notably some of the former Asian tiger economies, have failed to keep growing per capita GDP after their demographic dividends were paid out – falling into the so-called ‘middle income trap’.
But some, such as South Korea and Taiwan, have continued to improve living standards. The secrets to success are to keep improving productivity, narrow income disparities and to reform the services sector. China is more than capable of doing these things, and, significantly, has the political will to do so.
The current situation in China is admirable versus its international peers. In the slowest quarter of growth in 2012, the economy still managed to achieve 7.4% GDP growth in real terms, and by the final quarter of the year this had recovered to 7.9%.
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