“China Growth Shocks Increasingly Driving Stock Market, IMF Says,” Bloomberg, April 2016.
In recent years, China has been a convenient go-to excuse when markets are bad. For example, China’s banking sector is in trouble; debt levels in China are too high; China’s real estate bubble is going to pop… and China’s rate of economic growth is unsustainable and slowing (and/or the data showing growth is fake): These storylines have put food on the table for financial journalists for years.
There is a lot of truth in some of this. For example, it’s a statistical inevitability that China’s economic growth is slowing. Something that’s already very big, whether it’s an economy or a company, can’t continue to grow at a rapid pace forever. And over the past 15 years, China has become the world’s second-biggest economy.
China’s economic growth has slowed to 6.5 percent a year, down from an average of 10 percent a year from 1991 to 2015. But that still means that China’s economy is adding 6.5 percent to US$10 trillion each year. That means, even at 6.5 percent, China is adding the equivalent of four economies the size of Kuwait’s every year.
As shown below, since 2000, China’s GDP has grown over 800 percent – more than any other large economy in the world. The current fastest-growing large economy, India, has “only” seen its GDP, or total economic output, grow by 335 percent over the past 15 years.
Although China’s economy has grown dramatically, on a per capita basis it’s still small, given the country’s population of 1.3 billion people.
The U.S. and Singapore are still way ahead by this measure. The average GDP per capita (which is roughly a measure of how much wealth is created per person) in the U.S. is over US$55,800. For Singapore, it’s nearly US$53,000. China’s GDP per capita is only just over US$7,900.
How much more could China grow? If the U.S. is a benchmark, China could grow a lot more. The graph below shows the growth in U.S. GDP per capita since 1960 and China’s GDP per capita growth since 2000.
In the graph above, the black line shows GDP per capita in the United States from 1960 to 2015, while America was the engine for the global economy. Notice the incredible growth that ensued in the U.S. during that time.
The red line represents China’s GDP per capita from 2000 to 2015. Notice how closely it tracks America’s historical growth.
As you can see, China’s GDP per capita is about where U.S. per capita GDP was in 1976. But, U.S. GDP per capita growth took off from there. Now, 40 years later, U.S. GDP per capita is over US$55,000.
If China follows a similar pattern to the U.S., its economy still has a lot of growth ahead of it. Of course, it won’t happen in a straight line and there will be some dramatic ups and downs. But it does give you an idea of what could happen.
And this future economic growth will not be coming from low-paid factory workers making plastic toys and cheap electronics. China’s economy is becoming consumer-driven – that is, China’s booming middle class is spending more money on goods and services in China. This is slowly overtaking the export-driven model of economic growth that’s played a central role in getting China to where it is today.
How important is consumerism in China? According to digital marketing consultants eMarketer, China will pass the U.S. as the world’s largest retail market this year. That makes Chinese shoppers the world’s biggest spenders.
And that’s only the start. The Brookings Institution, an American think tank, projects China will account for 18 percent of total global middle class consumption by 2030. And the U.S. middle class is expected to only account for 7 percent of the world’s middle class consumption.
The key driver is the growth of the middle class in China. By 2022, at least 550 million Chinese will be considered middle class. (Middle class is defined as households earning US$9,000-US$34,000 per year.)
A growing middle class, with more money to spend on goods and services in China, will be the major stimulant for Chinese economic growth for the coming decades. So, while China’s economic growth has been spectacular for the past 20 years, it’s just getting started.
I’ll be talking a lot more about ways to invest in China’s future economic growth… and which Chinese stocks are in the best position to benefit from China’s booming middle class. More details on this will be coming soon.