Asia

Getting to know what China’s going to do

Two big pieces of news have just come out of China. The government is officially relaxing its one-child policy, which has been in place for 35 years. Couples will be allowed to have two children in future instead of just one. Also the official GDP growth target is to be cut to 7% from 6.5%. Today we explore what’s going on in this vast country a little more.

China’s one-child policy was put in place to slow down population growth in the world’s most populous country. Even with it in place China’s population has swelled to 1.4 billion, up 40% from when the policy was introduced.

There are 1.7 times as many people living in China as there are in the EU and USA combined.

To put that into perspective the combined population of the EU’s 28 countries is 503 million, and 319 million people live in the USA. There are 1.7 times as many people living in China as there are in the EU and USA combined. Clearly having a system of government to oversee such a vast mass of humanity is a monumental challenge.

Most outsiders don’t see China as a democratic country. But the Chinese see it differently. They describe their form of government as a “consultative democracy”, as opposed to the “elective democracy” that most people associate with this system of government.

The Chinese elite gain access to the Chinese “communist” party through invitations or applications. Its 82.6 million members have to prove themselves, and jockey for positions of increased responsibility and power.

What this means is that the Chinese leadership isn’t elected under a system of universal suffrage, where every adult citizen gets a vote. Instead they say it is the job of the party to listen to the people and act in their best interests for the country’s stability and development. This is why they describe the system as a consultative democracy.

I’m not trying to justify one system or another. But it’s worth noting a few things before jumping to the conclusion that China’s political system isn’t fair or adequate.

The first is the staggering results that it has produced, at least since the Chinese started putting hard core communism behind them in 1978. Economic growth has been truly extraordinary in recent decades, far outpacing any other country in the world. I’ll come back to that in more detail a little later.

Secondly we should remember a little of the past. The transformation of European and other developed countries from poor, agricultural societies into rich industrial economies mostly did not happen under a system of “one person, one vote”.

For example, Britain’s industrial revolution started around 1760. But universal suffrage wasn’t extended to all men until 1918 (after World War one), or to all women until 1928. For much of Britain’s supposedly democratic history, voting was limited to wealthy male land owners.

Before foreigners preach to the Chinese about their “unjust” form of government they should perhaps look to their own history books. Maybe elective democracy isn’t the best way to manage a huge, multi-decade economic transformation.

Thirdly, this form of government allows the Chinese authorities to take a very long term approach to strategic planning – five, ten, twenty or even more years into the future. They aren’t stuck in the four or five year election cycle, where countries can lurch from right to left leaning governments with very different economic and fiscal policies. This means China has stability that many elective democracies lack.

So perhaps China is better off sticking with its current form of government, for now at least, so it can concentrate first on getting wealthier. The luxury of elections and short termism may follow later.

For now it could be that a system that permits long term thinking and planning is more advantageous to the average Chinese person than the pretence of having an influence on decisions made at the top.

Western journalists may harp on about human rights abuses in China. In many cases they’d do better to look at abuses performed in the name of their own governments.

Chinese are focusing on what really matters to them: making money and enjoying all the pleasant life enhancements that come with greater wealth.

In the meantime the Chinese are focusing on what really matters to them: making money and enjoying all the pleasant life enhancements that come with greater wealth.

Right now we are on the cusp of finding out what will be contained in China’s 13th five year plan. This sets out the government’s strategic priorities for the next five years – for the 13th time since the communist revolution. (You’ll find a lighthearted and short video about how they put it together here, in English. But watch out – the song is catchy.)

Whatever your view of the Chinese political system – and I’m certainly not claiming it’s perfect or permanent – the economic results in China have been impressive in recent decades.

Between 1994 and 2014 the Chinese economy has grown by a factor of 13 times, measured in renminbi yuan, the local currency. That works out as a compound growth rate of 13.7% a year. Taking account of currency strengthening, it’s up 18 times in US dollar terms over those same 20 years.

Over the same two decades the US economy grew by just 2.4 times, or 4.4% a year (compound), including inflation. In other words China has been catching up fast to the world’s largest economy.

chinesenominal
Source: Chinese National Bureau for Statistics, OfWealth

 

Of course those figures are “nominal”, which means that they don’t take account of price inflation in the cost of living. They also don’t account for population growth, which has been ongoing despite the one child policy (up to now).

But even taking those things into account the results are impressive. To do this we need to look at GDP per capita (per person) calculated using something called purchasing power parity (PPP).

Different countries have different prices for goods and services – some being cheaper and some more expensive, depending where you live. And prices change each year. PPP figures are an attempt to strip out those differences.

Looking at GDP at PPP per capita for China it has increased by a factor of 8 times in the past twenty years. That works out as a compound growth rate of 10.9% a year.

In other words, the size of the economy has gone up 10.9% a year on average for each person living in China.

In other words, the size of the economy has gone up 10.9% a year on average for each person living in China. Along with that impressive economic growth average incomes have grown strongly as well.

It’s perhaps no surprise then that Chinese retail sales grew by 10.9% in the year to September 2015. (It’s a coincidence that the figures are exactly the same, but you get the idea.)

Chinese-GDP-ppp
Source: Chinese National Bureau for Statistics, OfWealth

 

Put simply, the Chinese are a lot better off than in the past, even if they are still a lot poorer than people in developed countries (who mostly had a 100 to 200 year head start).

But these explosive growth rates can’t continue forever. In fact, here at OfWealth, we’ve long been saying that the average rate of Chinese growth has to slow down.

That’s a natural process and nothing to panic about (see more here). So it continues to both amuse and bemuse us when so many Western analysts get in a panic about slowing Chinese economic growth. It’s bound to happen, in our view.

News has just come out that China is set to reduce its official real (inflation adjusted) minimum GDP growth target for the next five years. It’s coming down from 7% to 6.5% as the government seeks to create a “moderately prosperous society”.

This has resulted in the usual outpouring of angst from China watchers. Our view is “big deal”. At 7% the economy would double in size in 10 years and 3 months. At 6.5% it would take 11 years, or just 9 months more. That’s hardly a massive difference.

(In the next issue I’ll explain a handy little rule of thumb for calculating how many years it takes for something to double in size, at a particular annual growth rate. Every investor should know this really simple and incredibly useful tool.)

China’s economy is changing and maturing. One day its political system may change too, although that seems unlikely for now. In the meantime, if you want to know what China’s government is going to do, keep an eye out for details of their latest five year plan.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.