You can sum up the reason why China is no more than one or two decades from becoming the world’s largest economy in two words. And I say this despite reading a persuasive report that China’s rise to number one status is set to hit a rather substantial road block. The report I refer to overlooks these two key words.
China isn’t growing like it used to. That is common knowledge, but exactly how much has it slowed? That is difficult to answer, as the official data only seems to have the vaguest correlation with the truth.
Capital Economics has its own method of measuring growth in China’s GDP, which is produced by analysing data which is hard to fudge, such as electricity output and volumes of freight transport.
By that measure, China’s growth rate slowed to less than four per cent in 2015/16, and the sustainable growth rate is now between 4.5 and 5 per cent. Contrast that with the heady days when China was growing at 11 per cent plus.
If China can carry on expanding at the rate Capital Economics thinks is sustainable, then China will overtake the US as the largest economy in the world some time before 2030.
But Capital Economics has its doubts, and fears that the sustainable growth rate may fall to around three per cent, meaning it won’t overtake the US until around 2050.
This is a big deal, the point when the US loses its position as the world’s largest economy is about as important to global politics as you can imagine.
And whether China grows at five or three per cent has important implications for investors too. If Capital Economics is right, funds that focus on China, for example, become less attractive.
It is just that I think it is wrong, and therefore investors with a longer-term horizon need to allocate a fair proportion of their portfolio towards Chinese funds.
Before I explain why I think this pessimistic projection for China is wrong, let’s explain the pessimism. You can sum it up in four words: Trump, debt, demographics, and Xi:
For all these reasons, Capital Economics projects that China’s growth rate is set to slow dramatically, extending the time when China overtakes the US.
I disagree. And I disagree because of two words: Artificial Intelligence. While the US President portrays the credentials of a Luddite, China embraces AI. It is widely thought that China will lead the US in AI within ten years.
Part of the problem is data. AI needs data, lots and lots of it. And lack of data is holding AI back. By contrast, in China, where privacy sensibilities are less extreme than in say the EU, data is becoming available at a faster rate, especially in healthcare, which may yet prove to be the sector that benefits most from AI at a time when healthcare emerges as perhaps the most important sector in the global economy.
Linked to AI, China is less held back by legacy in adopting new technology. Take hyperloop, the much-hyped transport system that uses magnetic levitation and sends pods through partial vacuums inside tubes. One Chinese company is advancing plans for 30 hyperloop lines. See China's looking to one-up Elon Musk's hyperloop, and seems to be ahead of US and European companies.
Because of technology, the way the economy operates, the way it produces goods, and the way healthcare is provided for is set to be transformed.
And while there are a lot of interesting European tech start-ups, and the giant US techs currently sit in poll position, China, with Alibaba and Tencent in the vanguard, will move into the lead. For that reason, I do indeed think this is China’s Century. The next decade will see the big changes take effect.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees