The Top 10 China-Related Myths We Should FINALLY Acknowledge


The average financial pundit has about as much data-backed insight on the Chinese economy as an elephant has ballerina characteristics. Frankly, most Western analysts are guilty of simply perpetuating stereotypes which were either never accurate to begin with or which used to make sense years or decades ago but are anything but valid at this point.

Without further ado and in no particular order, here are the ten most “popular” China-related myths we should finally put to rest:

China’s renminbi is destroying the dollar’s dominance!

Wrong. While the renminbi has indeed been added to the IMF’s basket of currencies and while more and more trade is becoming renminbi-dominated, the volume dimension in no way indicates a systemically relevant threat to the dollar. The current trading volume numbers tell us that yes, the renminbi is surpassing the let’s say Swiss franc but is not even in the vicinity of the volume necessary to put the dollar at risk.

Chinese stock market crashes indicate that there is an economic collapse going on!

Not as much as in the West. Compared to more mature markets such as that of the United States, the percentage of its GDP represented by the total value of all stocks that are being traded is considerably lower when it comes to China, with this percentage being in the 100% zone or above for a lot of Western nations.

The Chinese GDP has grown exclusively thanks to exports!

Understandable statement but… well, wrong. For example, yes, it says “Made in China” on your iPhone but not because all components are indeed made there but rather simply because the final process has taken place in China. In other words, iPhones are indeed assembled in China but most components are imported from various countries to such a high degree that only roughly 4% of your phone’s value is something we can attribute to Chinese companies.

In other words, China has to import a lot so as to export and while it does have a humongous trade surplus with countries such as the US, it also imports more than people realize. As such, by subtracting imports from exports and looking at the resulting net export figure on a longer timeframe, we’ll realize this variable hasn’t been nearly as important as some analysts state compared to let’s say infrastructure investments.

China is only attractive because wages are low!

Nope, not anymore. At a certain point in its decade-long growth process, yes, that has indeed been true but at this point and beyond, the GDP growth process is far more sophisticated. As time passes and companies that are strictly interested in wage arbitrage move to nearby jurisdictions such as Vietnam or Bangladesh, China makes up for it through the growth of domestic companies capable of selling higher value-added products, through service sector growth and so on.

Incredible currency manipulation is going on over in China!

Partially true but highly misleading, in an environment where pretty much all central banks are engaged in let’s call it “unorthodox” monetary policy, whether we’re talking about taking interest rates to zero in the United States or even negative in the European Union, pumping $85 billion per month into the system at the height of QE in the US and even more at the height of the EU’s easing process and so on.

Also, keep in mind that inflationary threats are significant in China more frequently than in more mature economies such Western ones. As such, more often than its Western counterparts, China also manipulates its currency so as to AVOID downward action, something analysts tend to comment on quite a bit less.

China’s growth numbers are figments of the government’s imagination!

Understandable, most likely partially true but once again misleading, when we think about how countries such as Greece cooked the proverbial books and nobody cared prior to the Great Recession and about how the practice of making up numbers is a lot more widely-spread than we care to admit, whether we’re talking about a smaller country cooking its books or larger-scale scandals such as those which involved LIBOR rigging operations.

So, of course, it makes total sense to take China’s growth numbers with a grain of salt and when looking at them on shorter timeframes, there are frequently aspects which make you raise an eyebrow such as the lack of correlation between those numbers and verifiable metrics such as energy consumption. On longer timeframes, however, the Chinese growth story looks a lot more believable.

China is all about “old-school” economic growth!

No longer true. From being the global leader in solar energy as well as wind energy production to being poised to dominate cutting-edge sectors such as Artificial Intelligence and robotics, China’s economic growth model is evolving as the economy matures. Perpetuating stereotypes that stopped being valid years and even decades ago does nothing more than hurt your credibility as an analyst.

China’s GDP is already quite large, there isn’t all that much potential on the table!

While the initial statement is true in light of the fact that China has the world’s #2 nominal GDP, the second one makes little sense in light of how low the GDP Per Capita is in China compared to developed nations such as the United States. With a value almost six times lower than the US one and nowhere near the average of let’s say developed nations, there is still ample room to grow and we need to understand that at this point, China’s GDP is ALSO a function of its huge population.

There’s SO much “untapped” labor in China!

Once again, that is no longer the case. For an extended period of time, the workforce kept expanding over in China as a result of positive demographic trends. At this point, however, like in most Western nations, the trend has reversed. As the population of China keeps aging (in part also a result of past policies such as the one-child one, let’s not forget about this aspect either), the labor force participation rate goes down, as there are less and less people young enough to be economically active.

The party is over once China’s economic growth rate slows down!

Prior to embarking on its reform journey as of 1978, to say that China had a lot of catching up to do was literally the understatement of the century (the 20th century, to be more precise) and doing so without 10% YOY economic growth rates was mathematically impossible. However, it’s just as impossible for this trend to continue indefinitely. As the gap between China and Western nations gets gradually filled, GDP growth expectations need to become more and more realistic (or else, we risk turning China into a bubble or downright Ponzi scheme) and the fact that as of 2010, there have no longer been 10%+ years is not worrying… it’s reassuring in terms of sustinability.