Making Sense of China’s True Growth Potential?


There are perhaps three main aspects which make some analysts believe China doesn’t have all that much growth potential anymore:

  1. China currently has a very high nominal GDP (90 trillion Yuan for 2018, roughly $13 trillion), so how much room can there possibly be to continue not just growing but also outperforming other nations?
  2. As mentioned in another video, China’s economy is indeed slowing down, with its pre-2010 growth rates that exceeded 10% YOY being replaced by more moderate expectations, such as 2018’s 6.6% YOY growth and 2019’s 6 to 6.5% projections
  3. The current trade uncertainty with the United States

Let us cover these three reasons one by one.

First of all, while it is true that China’s GDP is currently very high, enough to place it firmly on position #2 in terms of nominal GDP and position #1 on a PPP GDP basis. However, there is more to GDP than just glancing over the number. If China and the United States had were similar in terms of population, then of course, the GDP argument would have been exponentially stronger. But that is hardly the case.

In 2018, the United States had a population of approximately 327 million 4.28 times lower than the population of China. As such, concerns about China’s GDP size being a limiting factor can be revisited once China actually gets close to hitting parity with the US on a GDP Per Capita basis. Which, at this point, would obviously require a GDP that is over 4 times greater on China’s part.

Secondly, few people with close ties to China are actually bothered by the slowing down of China’s economic growth. There is a time and a place for everything. A less developed nation that is just starting to get serious about entering the international scene, as was the case with 1978’s China (on the cusp of Deng Xiaoping’s reforms) is likely to start experiencing tremendous growth because it has to in light of just how much catching up lies ahead.

That is no longer the case with China. And while investors can be rewarded with higher returns in a situation similar to China’s 1978 one compared to 2019’s China, the risks involved are also considerably greater. So great, in fact, that the actual risk to reward ratio might look quite a bit better in 2019 than it did in the turbulent period following Mao Zedong’s death.

Therefore, while some are worrying about this slowdown, others are actually embracing it as a sign that maturity is upon us. As always: don’t just limit yourself to analyzing the risks exclusively or the potential rewards exclusively when trying to assess how attractive an investment is. The elephant in the room as far as investing is concerned will always be the combination between the two dimensions, the (in)famous risk/reward ratio.

Finally, it should come as no surprise that some are worried by the increased trade-related tensions with the United States. However, what many fail to take into account is the highly interconnected nature of today’s global economy. In many respects, engaging in a trade war can be considered similar to burning down one of your subsidiaries because you don’t see eye to eye with its regional manager… perhaps not the best idea in the world.

I believe it is important to understand that the Mutually Assured Destruction principle is not just valid when it comes to nuclear war. While the United States can try to cripple China with trade sanctions and even outright trade bans, China can retaliate by liquidating its USD foreign reserves, among many other things.

Can the United States succeed in crippling China? Yes.

Can China succeed at crippling in United States? Yes.

Would everyone else suffer as well? Most definitely.

Policymakers are starting to become increasingly aware that belligerence is just not all that feasible in the 21st century and beyond. That nobody actually wins a trade war. That Mutually Assured Destruction is a quasi-given when two economic superpowers are involved. As such, while worrisome, trying to see the big picture should ease many of the trade-related concerns one might have.

As this analysis hopefully made clear, China continues to have more than enough growth potential, whether we’re talking about catching up with the West in terms of GDP Per Capita, finding its rhythm as a mature market or reaching mutually beneficial trade agreements which make all parties better off rather than put the world’s economy at risk.

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