Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
The Dragon’s Evolution
Published Date : October 19, 2015
Over the centuries, the Chinese economy has been through many transitions. Before the isolationist policies of the 17th century, the country actually enjoyed the position of being the world’s second largest economy. However, the collective decision to not participate in the industrial revolution proved to be detrimental and by the time Mao Zedong died in the 1970’s, the country’s ranking had been reduced to number nine. Through economic reforms focused on opening the country to foreign trade, investment, and new technologies, the Chinese government successfully orchestrated a change in course and by 2010, it had regained the position of the world’s second largest economy. Today, following 30 years of growth that was greatly impacted by investment in infrastructure as well as global trade, China’s economy is experiencing another transformation and has become the most compelling consumption growth story in the world.
The recent focus on the extreme volatility in China’s mainland stock market, a modest devaluation of the Yuan, and slowing industrial activity, has caused many to question the sustainability of China’s growth. Following 30 years of double digit expansion, the country’s economic base is so large that a 6% growth rate today generates more than double the contribution to global output that a 10% growth rate did just 10 years ago. While industrial growth peaked several years ago, the consumer economy has continued to gain momentum over time. The services sector, the property market, and retail sales are currently growing at a double digit pace, which is supportive of a shift toward consumption. In fact, consumption accounted for 60% of the country’s GDP growth during the first half of this year. With a population that is more than four times that of the U.S., China will likely become the number one economy in the world before the end of the decade.
Our view is that consensus opinion has severely discounted the long growth cycle facing China as the country evolves. Robust growth in wages combined with very little inflation and low levels of consumer debt have set the stage for continued progress. Not only have these elements improved the overall standard of living for millions of people and thus increased discretionary spending, they have also increased the cost of doing business in China. This has led low-end manufacturers to move production to neighboring countries where labor costs continue to be very low, while jobs that require a greater level of skill have remained in China. Government spending has also supported this evolution as education, healthcare, and environmental protection are now top priorities. As China’s workforce becomes more highly educated and compensated, this should continue to fuel growth in consumption and services, despite having to work through this mix shift in underlying economics.
At Sand Hill Global Advisors we monitor and evaluate global investment opportunities as part of our investment process. Several of the managers in our international equity allocation focus on many of the themes mentioned in this commentary, including investments in companies with businesses tied to the Chinese consumer, increased levels of automation in Chinese factories, and environmental clean-up and protection in China. As China’s economy continues to mature, we feel these themes should continue to provide growth and create value for investors for many years to come.
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