February 5, 2017    10 minute read

The Economics of China

The Silicon Dragon?    February 5, 2017    10 minute read

The Economics of China

The Asian superpower has consolidated its position as the second-biggest economy in the world. After decades marked by population growth, major trade agreements, and a very open economic policy, China went out to become a local leader. Now, it has shown a willingness to really accept a full leadership role in world affairs, particularly since Trump’s promises of protectionism.

The extent of Chinese investment can be seen everywhere, from energy companies all over the world and peace-keeping missions in Africa to Hollywood blockbusters. Chinese technology brands have slowly introduced themselves into Western markets and offer fierce competition to traditional sellers.

However, the Chinese government has already been preparing to face extensive demographic challenges in the coming future.

An Ever-changing Economy

A lot has changed in China since 1978, when the Asian country implemented market reforms and went from a centrally planned economy to a market-based one. It emphasised the extreme importance of values such as competitiveness, and openness to establishing trade deals with other nations.

This paid off for the Chinese as the country boomed in the 1990s, leading to major social developments as a consequence. Since 1978, its GDP increased by an average of 10% a year, the quickest sustained surge by a major economy ever recorded in history. Even though it is still considered a developing country, China has been able to pull 800 million people out of poverty.

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800m Chinese have been lifted out of poverty since 1978

It is now making valuable humanitarian efforts in developing countries as well as playing a major leadership role as the world’s second-biggest economy.

Not Quite so Rosy

However, the nation is far from being free of challenges. Its per capita income is still a very small proportionate to that of other modern developed countries, and estimations point out that there are currently still more than 70 million people living in poverty in rural areas, according to the Chinese poverty standard.

There are also major concerns about the extreme inequality and environmental issues caused by fast economic growth. The country is now the largest manufacturing country and exporter of goods in the world, having overtaken the United States in 2010. China has been championing free trade, and, as the largest trading nation in the world, it has trade agreements with several countries outside the World Trade Organization.

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However, the last few years have been marked by efforts in countering high levels of air pollution and investing in transformative state-of-the-art technology and innovation as opposed to traditional manufacturing. China is betting big on establishing itself as the world’s leading technology manufacturer.

The Next Tech Giant?

Many of China’s largest companies are state-owned enterprises, yet none of its top 20 specialises in technology, being mostly focused on oil, energy, and banking. This doesn’t mean, however, that Chinese tech companies shouldn’t be taken seriously. There is great potential for future growth as the country’s top export is electronic equipment (worth $600.3bn in 2015).

China has a monopoly on almost all of the world’s rare-earth metals that are crucial for making most of the tech products we enjoy today, including laptops, tablets, smartphones, and even many military and medical technologies. Two of China’s biggest exporter companies specialise in diversified metals such as these.

Beyond rare earth metals, there are other cases of strong investment that are now paying off. Lenovo is a good example. Not only did the Beijing-based company become the number one computer maker in the world in early 2015, it also managed to do so in less than ten years, after buying IBM’s famous PC business. The company is now looking to become one of the major tech companies in the world after buying Motorola and investing in a new server business.

Shifting one’s gaze from computers to internet businesses, the examples are even easier to spot. Chinese e-commerce Alibaba holds the world record for the largest opening day IPO when it raised 25 billion dollars. Tencent’s WeChat had more mobile transactions over 2016’s Chinese New Year period than PayPal achieved in the whole of 2015.

$25bn is how much Alibaba raised in its IPO

Together with Baidu, these companies make up the top three tech behemoths in China, representing an estimated combined market cap of 400 billion dollars. They are defying gravity in a global digital economy.

China is expanding its influence, and of the top fourteen private tech companies valued at more than 10 billion dollars, five have headquarters in China (according to PwC). Some analysts note that even the new cryptocurrency Bitcoin might have survived one of its toughest years to date thanks to China.

The Dynamics Are ChangingIn fact, it is estimated that China’s bitcoin markets account for about 98% of the entire trading in the global bitcoin market.

While China is still far from being a developed nation, there have been efforts made to improve its status at a steady pace. The national minimum wage is currently 2190 yuan per month, which translates into £251. This may not seem like much, but it’s a significant improvement compared to four years ago, when it stood at 1450 yuan per month – or 10 years ago, when it was just 750 yuan per month.

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Raising the minimum wage is a clear indicator that China’s government is dedicated to giving a better living standard to its massive population and to countering the current levels of poverty. It shows signs of an emerging consumer class that, at the same time, pressures companies’ costs.

When it comes to competitiveness, China reached an all-time high this year, with 4.95 points out of a maximum 7 on a competitiveness index in the World Economic Forum’s Global Competitiveness Report. It comes 28th out of 138 countries on the scale – considerably higher than the 4.55 points it had years ago.

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In a report published in 2014, Deloitte wrote that the key to China’s continued “prosperity competitiveness” is to continue opening up to free markets and the liberal world, as well as letting investment in. However, figures measuring Chinese corruption are not so exciting. On the Perception of Corruption 2015 Index, the Asian giant scores 37 points – worse than the 35 points it achieved in 2007.

This reveals complex reasons for concern. Some measures have been taken, though. The superpower is now in the middle of an anti-corruption campaign.

98% of all bitcoin trades are made in Chinese markets

Last year, the Government sacked General Wang Jianping for “violating party discipline” (a euphemism for corruption). Dozens of other officers were also investigated by the Chinese authorities.

Yet Transparency International has still urged the nation to take “more seriously” its commitment to prosecute Chinese companies for shady dealings with officials from other countries.

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Silent and strategic investment

China has never invested so much in Europe and the United States as it does now. Chinese businesses invested $23bn in Europe and $15bn in the United States in 2015, according to a report by Baker & McKenzie and the Rhodium Group.

Before this, the Chinese Government had been buying European bonds since 2008, and now Chinese companies have stakes in several European businesses – a consequence of the “going out” policy implemented in the 1990s.

$23bn is how much Chinese businesses invested in Europe in 2015

While many notice China’s expansion in Asia, there is also a meaningful investment in Africa. The Chinese way of doing business doesn’t interfere in Africa’s politics and is based on private enterprise, which the local governments seem to appreciate.

In Congo, for example, China is building roads and schools while reaping the lion’s share: natural mining resources to keep its industries running.

Chinese investors have also started to look at Hollywood, too, as a profitable opportunity. Tang Media Partners bought the Hollywood film financier IM Global shortly after Dalian Wanda bought a controlling stake in Legendary Entertainment Production Company for $3.5bn.

Production companies such as Warner Brothers and Lions Gate Entertainment also have Chinese capital, as Chinese investors are looking for better ways to grow a cinema market that will likely surpass the US as the world’s largest this year, according to PwC.

Paving a Sustainable Path

When China signed the historic Paris climate agreement, there was speculation about Beijing’s ability to follow up on the promised deal, and rightfully so. Only 10% of Chinese companies carry out sustainable initiatives. But sustainability is finding its way in China too and some companies are spending hard to make amends.

Since 2008, China’s state-owned companies have been carrying out sustainability projects about water conservation, wildlife protection and carbon footprint reduction. Recently, its government has been pushing environmental regulations, also in order to attract foreign investment more easily.

At this year’s World Economic Forum in Davos, the Chinese President Xi Jinping strongly stressed environmental issues and sparked speculation that China might come to lead the fight on climate change at a time when President Trump doesn’t even acknowledge the issue.

Also, five of the top six solar panel manufacturers and five of the top ten wind turbine makers are in China. Still, with a very long way to go, the Asian superpower made the highest investment in renewable energy in the world in 2016, at $88bn. With Trump’s focus on other issues, the next four years could be a turning point for China as it has the chance to become the climate change champion the world needs.

Can China Keep Up with Itself?

With 1.3 billion people, China has the largest population of any country in the world, but not even the relaxation of the one-child-policy last year has been enough to significantly counter its declining birthrate. This tendency could prove dangerous for the economic future of the nation as its ageing population will increase and pressure public services and social security.

25% of the Chinese population will be older than 60 in fifteen years

According to estimates from China’s Development and Reform Commission, 25% of the population will be older than 60 years old by 2030 (the figure stood at 16% in 2015) – and the population of working age, between 15 and 59, will be 80 million smaller in 2030 than it was two years ago. The question that remains is whether or not it is too late to change course.

Adaptation Is the Name of the Game

China already proved countless times that it is ready to adopt a leadership role while championing international free trade and, perhaps, climate change. It is emerging as a superpower in the tech world and spreading its footprints all over the world by either investing in resources for its future or buying stakes in the successful enterprises of today.

There are still understandable concerns about sustainability and endurance. Can China achieve all its goals while complying with international rules? Can it save its economy from the consequences of an increasingly ageing population? The next few years will likely shed some light on this.

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