The fact that China’s population number lies north of 1.4 billion represents an element which one cannot afford to overlook in a detailed analysis. Sometimes, this number comes with positive implications, whereas oftentimes, it can be misleading and make us believe that China’s dominance in certain sectors is a function of its efficiency… when in fact, it’s mostly a function of its population. At the end of the day, just like an employee adjusts his wage for inflation in order to determine his “real” wage (a value which reflects his actual purchasing power), we need to operate adjustments as far as the population dimension is concerned so that our numbers paint an accurate picture of reality.
Let’s start with the positives. As some of you might have suspected, especially the more loyal ChinaFund.com readers, many of them are related to the growth potential China still has, despite being the world’s #2 economy in terms of nominal GDP. Yes, China has a higher GDP than Japan and Germany… but a much larger population. As such, we need only calculate the GDP Per Capita for each country so as to understand just how much growth is still on the table for China.
According to recent World Bank data, China’s GDP Per Capita is still 6.5 times lower than that of the United States, despite it being 25 times higher than it was prior to China’s 1978 reforms. Again, this is the picture of reality the population dimension helps us clarify. If China and the United States would have had a similar population, a compelling case could indeed be made that above-average growth potential is dwindling. However, in light of the fact that it is hardly the case, the population-oriented GDP Per Capita number provides clarifications the nominal GDP values fail to illustrate.
Unfortunately, it’s not all sunshine and rainbows with respect to the influence China’s population has on the various metrics that are measured. Eloquent examples to that effect are represented by the numbers pertaining to the many industries China dominates. From common ones to unexpected industries such as solar and wind energy (with China being the world’s number one producer of both solar and wind energy), nobody can deny China’s dominance.
However, the reason(s) behind said dominance are oftentimes up for debate. Is China the world’s #1 producer of solar and wind energy because its efficiency is superior to that of other players such as the US? Is China the world’s #1 market for electric vehicles because it is blazing trails? When it comes to quite a few such industries, while it is true that tremendous progress has been made in terms of efficiency, we need to understand that the sheer size of China’s domestic market definitely makes it easier to become a global leader.
To put it differently, when it comes to many industries, it is more than enough to simply cater to the (increasing) needs of China’s domestic market to achieve sales volume numbers high enough to make you the global leader. Of a random sample consisting of 100 people you know, how many of them have used Alibaba? Or purchased a Geely vehicle? Or even knew China was capable of manufacturing electric vehicles? Most likely not many.
As such, in quite a few cases, China’s dominance ends up being primarily a function of its population. In other words, Chinese companies are indeed experiencing sales volumes that make them global leaders but not because they are more efficient than their Western counterparts but rather because they service a domestic market that is more than generous through its sheer size and by itself, is able to help them generate impressive sales volume.
If you have the habit of depending on magazine or newspaper headlines for your China-related information, the images you have formed in your mind most likely do not accurately reflect reality… not by a long shot. Time and time again, journalists as well as analysts are guilty of hasty generalization, of drawing broad conclusions without properly analyzing the situation on a granular level. The analysts who say there is no more room to grow due to China already having the world’s #2 GDP on one end of the spectrum and the analysts who claim China is the most efficient player in all industries it dominates on the other.
Skepticism is the operative word, especially when it comes to a misunderstood markets such as China. Furthermore, it might be wise to work with entities, such as ChinaFund.com, that actually have a strong local presence and are able to provide meaningful and actionable insight in a non-sensationalist manner. There are ample profit opportunities in China for those who are willing to put in the work required to make informed decisions. Alternatively, pitfalls abound.