Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Enter the Dragon - Outside View by Nitin Gregory

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Enter the Dragon
Apr 4, 2016

It has been two months since I moved from India to China. As a child, I saw a photobook on China. It presented a calm and agrarian economy. As I grew up, I read a lot about China's meteoric rise. None of which prepared me for what I was about to see.

For example, Nanjing, the city I live in, is classified as a tier-two city in China. It has roughly the same population as Chennai - around eight million. Both cities have a rich history, but that's where things start to diverge...

Nanjing is roughly six times larger, which means a much lower population density. Nanjing's estimated GDP is about half that of Chennai ($100 billion versus $200 billion). But it has a much more developed infrastructure network - roads, highways, bridges, and underground transport are impressive.

I was surprised at the state of infrastructure and the planning that went into the city.

The last 30 years have been a period of very fast growth for China. The GDP of China in the 1980s is estimated to have been $200 billion. It is now $12 trillion, and China is the world's second-largest economy.

What's been behind this fast growth? I've written earlier about the key components of growth and the characteristics of catch-up growth.

This "investment-led" growth model has been used by other Asian countries, but the size and scale in China is unique. This has increased interest in economic insights related to China. One of the most common discussions is about the need for rebalancing. I will discuss this in two parts.

Internal rebalancing

Historically, domestic consumption as a percentage of GDP has been low in China, averaging close to 36%. Compare that to 68% in developed economies like the US.

This means the growth has been generated through capital deepening, which has come through two channels. One channel comes directly from the government. The other comes from banks that have been lending aggressively to the manufacturing and real estate sector. This has led to overcapacity. The Chinese five-year plan talks about streamlining state-owned enterprises (SOEs) which will result in job losses.

In Avoiding the Fall, Michael Pettis talks about rebalancing between investment and consumption. Part of this will happen through unemployment and public spending. He describes other means such as tax cuts and privatization of state-owned enterprises.

External rebalancing

The last few decades have seen the exports from China to US rise. The trade deficit with China is key issue in the US presidential elections. This represents an imbalance between the two countries. Usually this gets corrected through a change in the currency exchange rates. The exporting country currency revalues upwards, making its exports less competitive.

The depreciation of the renminbi in 2015 was a concern for China's trading partners. There was a worry that the move was aimed at increasing exports (to offset the anticipated drop in investment).

But it was more likely a function of capital outflows from China. It is estimated that the central bank spent close to $500 billion in foreign reserves trying to defend the currency. The effect of boosting exports through currency depreciation in a weak global demand scenario is minimal. The Chinese premier has indicated that they will not seek to boost exports through currency depreciation.

The future

China has pulled off what seems to be a miracle - about half a billion people have seen a dramatic increase in their standard of living in just two decades.

Many issues still need to be dealt with, and the government and the public seem to understand this. The broad theme of the next few years for China will be rebalancing. The question remains how this will play out - How will the consumption patterns change? Will there be a rise in services? What are the drivers of the housing market? How will currency changes impact the debt levels?

We will explore this further in later discussions. Understanding China is fascinating...and increasingly vital given its rising importance.

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Enter the Dragon". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Kotak Balanced Advantage Fund: Advantageous For Your Portfolio? (Outside View)

Jul 19, 2018

PersonalFN takes a look at Kotak Balanced Advantage Fund, a New Fund Offer (NFO) from Kotak Mahindra Mutual Fund.

How to Build Affordable Homes in India (Vivek Kaul's Diary)

Jul 19, 2018

Rajiv Talwar, the CEO of DLF, makes a few interesting points in a recent interview.

These Are the Best Stocks for the Next Decade (The 5 Minute Wrapup)

Jul 19, 2018

The start-up eco-system is disrupting each and every sector that we know of. How can Indian investors benefit from this?

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 19, 2018 (Close)