Only the most recklessly optimistic investors would have assumed that the let’s say pre-2010 economic growth trajectory of China can be maintained indefinitely, with yearly GDP growth rages in the double digits. While such a trajectory was not only possible but downright required back when China was a much poorer nation if the country were to ever hope that parity with the West would at least be in sight, the game has obviously changed in light of the fact that on a nominal GDP basis, China is now the #2 economy worldwide.
A mature economy, in other words, correct?
After all, can the number two economy worldwide be considered anything but mature?
As strange as it may seem, the answer to the first question is negative, whereas the answer to the second one is affirmative. To provide a bit more nuance to the first answer, perhaps “no, not yet” would be a better choice because while tremendous progress has been made across pretty much all sectors of the Chinese economy, we are not quite ready to consider it a mature economy/market at this point.
Moving on to the second question, let’s just say that being the world’s number two economy in terms of nominal GDP is not just enough. Or, to put it differently, this metric alone (if we do not add other data points to the mix) tends to paint a picture of reality that is… well, incomplete. As mentioned frequently here on ChinaFund.com, we’re not dealing with Luxembourg here but rather with a country that boasts a humbling 1.4 billion population number.
As such, as explained through a previous article, the fact that China currently represents the number two economy worldwide in terms of nominal GDP is for the most part a function of its population. If we adopt a more granular perspective and try to see things from the perspective of the average individual, we can not help but notice that metrics that pertain to that perspective are anything but impressive.
For example, China has a GDP per capita level that barely exceeds $10,000 and to be at parity with Western nations such as the United States, a 600%+ increase would be required. Yes, China’s GDP per capita levels multiplied by its impressive population brings us to a GDP high enough to occupy position number two but when it comes to the life of the average individual, we are most definitely not ready for the proverbial spotlight.
What would happen if we were to ask the average Chinese citizen if he considers himself a participant in a maturing or mature economy? It is quite likely that more than a few old(er) respondents would think about the more distant past and how much better they have it at this point and be quick to proudly reply that in light of how far China has come, the Chinese market can be considered mature. A younger person who has perhaps traveled abroad enough to be able to put a more comparative perspective on the table would most likely provide a much more nuanced answer.
All things considered, the data currently points to a conclusion which revolves around China being a maturing rather than mature economy and to the average observer who is beginning to manifest more interest in “all things China” as an investor, this may seem like bad news. In fact, the elephant in the room is a fairly simple question:
Is it bad for investors that China is ”just” a maturing economy?
While the answer to this question does depend on subjective preferences you might have as an investor (for example, you might place the comfort associated with knowing you’re investing in a robust/mature jurisdiction above potential returns in terms of importance), the ChinaFund.com team considers that at this point, the fact that China’s economy is “just” maturing actually represents a significant selling point.
At the end of the day, it would perhaps be wise to look at investing in general as one big trade-off. Do you want the additional piece of mind associated with investing in a more mature jurisdiction? No problem, just don’t expect record-breaking returns. Do you want generation-defining returns that have career-altering potential? In that case, you must be willing to take on a higher degree of risk, including… you’ve guessed it, jurisdiction-related risks.
In our professional opinion, China puts a remarkably appealing balance between maturity and potential on the table. With many of China’s markets anything but mature, opportunities abound on all fronts, much more so than in the proverbial West. From opportunities that revolve around doing a better job in terms of meeting the currently identified needs of the Chinese population to those associated with needs that are common in mature markets but have yet to be properly discovered and addressed in China, there is most definitely no shortage of business potential in China.
The same principle is valid in terms of potential associated with Chinese capital that can be put to work abroad, from (in)famous Chinese tourists who aggressively consume products and services abroad to well-funded Chinese investors who want to diversity… once again, opportunities abound.
Yes, there are many pitfalls that need to be avoided, from legislative ones to economic risks associated with maturing economies. No, gaining exposure to Chinese assets and being on the receiving end of this mega-trend will not exactly be a walk in the park. But in our opinion, it is certainly a battle worth fighting and those resilient enough to stick around will be more than generously rewarded. If you are interested in precisely that, the ChinaFund.com team is here to listen to your goals and do everything it can to help you achieve them, simply get in touch by sending us a message through our Contact page and we will reply as soon as possible.