by Zeping Ren
2018 was the most difficult year for China economically in a decade. The stocks in the Chinese stock market and Bitcoin were among the worst performing assets all over the world. Basically there were several factors causing this misery.
First, the rise of interest by Fed had resulted in tightening of liquidity globally. In addition the trade war imposed by President Jump upon China had disrupted China’s export. Internally the Chinese authority had to tighten the money supply and close down substandard factories in response to sharp rise of debt level, overcapacity and severe pollution. Given shaky outlook of the Chinese stock market and the Chinese yuan, pressure was acute last year as Chinese money was keen to looking for safe heaven overseas.
However in my opinion, the glooming situation is changing as positive signs are emerging that the Chinese economy will bottom out in the middle of this year. The stockpile of inventory is down; the control of liquidity is easing as money supply M2 starts to increase.
The Politburo of the Chinese Communist Party, the top body of the leadership held a special conference on the economy last July. In the communiqué of this meeting, deleveraging and curbing the rise in housing prices were highlighted. However both of these two tasks were gradually phasing out towards the end of the last year as the Chinese government started to stimulate the economy in a selective manner in the third and fourth quarters of last year.
In fact, the Chinese economic development has come to second stage, which is featured with a medium speed growth. To a great extent China’s economic boom in the past was based on the expectations that the reform would grantee a rapid economic expansion for many years to come. In reality, such expectations ran too fast and the reform did not keep up.
China’s next round economic expansion will have to be driven by the substantive implementation of the reform. In fact the talk between China and the US on trade disputes which is likely to have positive result next month will be a catalyst for China to advance reform in many key aspects. China has made pledge on further opening up of the domestic market to foreign investment, in particular the automotive and financial industries. China has lowered tariffs and conducted a major tax cut of 2 trillion yuan in order to support the businesses regardless state owned, private and foreign funded enterprises.
China’s per capita GDP is 9,700 US$ at the present, only one-sixth of that of the United States. China’s urbanization rate is less than 60%, while it is 80% in average in developed countries. Therefore China’s potential is huge for a continued economic expansion in the next twenty years.
As long as maintaining a growth rate of 5% to 6%, China’s economy will exceed that of the US in less than a decade. The current size of the Chinese economy is roughly equivalent to 66% of the US economy and 16% of the world. With a population of 1.4 billion, China will continue to be the largest market and has the largest middle class in the world.
China is still rich in labor supply. Currently China has more than 8 million college graduates every year. Though the total supply of labor in China is declining, the quality of labor force is improving. This is one of the key factors supporting China’s booming innovation and development of high tech entities, from startups to sophisticated large companies.
As long as China firmly continues with market-oriented reforms and the open-door policy, we believe that China will have another cycle of medium-speed development in the next 10 to 20 years. Therefore the best opportunities worldwide for investment will be in China in the next decade or two.