The sound of breaking China, or China by numbers

5 mins. to read
The sound of breaking China, or China by numbers

As my response to what seemed the panic and hysteria of the Great Fall of China last week, I got myself a pencil and the back of an envelope on which to do some revealing calculations.

Although something has frightened the birds in the China stock market chicken coop, it certainly isn’t the result of ten years of basic arithmetic. First, I have seen no compelling evidence over sufficient time that China will not continue to grow at around 7% p.a. for a while; apart from the fact that the Renminbi is overvalued by being fixed against the US dollar. Second, gross domestic product in absolute volume terms is now far greater than it was ten years ago, simply as a result of past 10% annual compound GDP growth. That has led to China becoming the world’s second largest economy; it is getting close to becoming as large as that of the US. It is not about to vanish.

Do not confuse the real Chinese economy with the Chinese share market, which was clearly full of private investor beginners who appear to have grossly overvalued its shares but still kept buying past the point of rationality. Something similar happened in Germany during the last decade of the last century when rookie investors over-invested in equities in what was described as the equity cult.

Here is an arithmetic observation: 7.5% growth in China’s GDP in 2015 will produce the same volume of GDP growth as that produced in 2013 when the Chinese economy grew 10%, because the economy is larger. That may be a bit disappointing but only in percentage terms. It is hardly a disaster for China or the world in general. By extension, even a mere 3.5% current growth in China’s GDP this year would, on the face of it, produce nearly half the rate of China’s volume of GDP growth in 2013 when it was increasing at 10% p.a.

If the world’s second largest economy was to grow at 3.5% annually – a week or two ago experts were estimating twice that amount – along with that of the world’s largest economy, that still sounds like big and useful growth.

People need to stop to think and do the numbers and not drop into Armageddon mode. Until now, most informed observers of China’s growth have estimated it likely to increase between 7% and 7.5%. That may still be on the cards. Time will tell. Truth, as they say, is the daughter of time.

If China’s GDP was a 100 ten years ago, it is now equal to 260 simply as a result of ten years of 10% GDP compound growth. In other words, China’s economy is about 160% larger than it was ten years ago. It could not have kept growing at 10% perpetually. To do that, it would need a second planet to do it on. Moreover, a 7% growth rate, if achieved, for a while, will give 84% more in terms of volume growth than that produced ten years earlier.

Consumer economics; the fascinating Chinese comparison with the UK

China is not yet a consumer economy in the way America has been since the 1930s and we in the UK have been since the 1960s. China is in a similar condition to non-consumer Britain in the grey fog-and-smog-covered 1950s. There was consumption, and had been for three hundred years or so, but it was not shared out in the way it had become in the US from the 1930s onwards. It was not democratic consumption.

The elite of the UK had a rich and proud history of consuming the very best that the world had to offer, from wines, tobaccos, clothing, vehicles, travel, fine restaurants and grand hotels etc. That demand was narrowly based.

The major part of the UK population, like the Chinese today, worked in factories and had little to consume. It was not anywhere near being what we call a consumer economy, as we now know it. For the then working class of the UK, the zenith of the consumer life was a trip to an austere but jolly Butlins holiday camp by the seaside – somewhere like Filey – a night at the pictures and a pint of bitter and a Babycham for the missus or girlfriend, in the saloon bar of a friendly public house. There is also of course, the luxury of a plate of good old fish and chips; none of that foreign muck! Sixty years later, all has changed dramatically in the UK.

It may be, that for that reason, the majority of common people, the bulk of the British population, was then more sociable; less given up to navel gazing as they tend to be now – quite literally so in some cases. The iron of divine consumer discontent – not having exactly what you require (or what advertisers persuade you to require) had not entered their souls. The British famously never complained at what was put before them, in those days; they were cheerful and generally patriotic, brought up to salute the flag at school on Empire day. Again, rather like their modern Chinese counterparts do in school playgrounds today.

As a result, we are not as yet as dependent on China as a buyer of western consumer goods as we hope to become in years hence. True, the Germans and others provide them with cars, and international luxury goods companies (a few British like Burberry and Mulberry) supply status indicator fashions, perfumes, pens and watches, but we have a long way to go before the average Chinese Jo – or Ho? – becomes a spoilt child of consumption – like us. To date, Chinese demand from the West and the emerging economies, has largely been for factors of production like minerals, metals and hydrocarbons. But now the Chinese government, having created a solid base of manufacturing and infrastructure employment for the mass of the population, wants to grow its domestic activity through product and service consumption.

That may cause disruption and uncertainty but it is the right long-term approach both politically and economically. That is what we all want. Many of us will have seen those futuristic analyst projections, usually as part of new company capital raising, if so many hundreds of million of Chinese started buying this, that or the other… It is the stuff of gratifying dreams and business models.

Finally, we have India waiting in the wings to follow China as the next infrastructure act; they certainly have the need and capacity for similar progress. If that happens whilst China successfully turns into a consumer economy, then “you ‘aint seen nothing yet”!

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