There is so much noise around trade between China and the United States — or, rather, the threat of a trade war brought on by President Donald Trump’s tariffs and confrontations and China’s recalcitrance in opening up its markets — that it’s easy to lose sight of the big picture.
Are the U.S.-China trade talks going well? Will the White House get its act together and present a unified front? Will Trump tweet something damaging or conciliatory? What did he have for breakfast?
These vicissitudes in U.S.-China relations aren’t meaningless, insofar as they seem to be moving markets on a daily/hourly/minute-ly basis. But in the big scheme of things, maybe they won’t amount to a hill of beans. And when it comes to gauging China as an investment opportunity, they might be just a distraction.
One short-term reason to look at the big China picture — you know, 6.5-per-cent-plus growth, GDP per capita that will likely double in this decade, an economy that will be the world’s largest in a few years, strengthening political and trade status in Asia and Europe, a growing middle-class consumer base, and so on — is that an important window into Chinese equity markets will open this year.
Come June, global index company MSCI will begin to include blue-chip, yuan-denominated A-shares, which trade on the Shanghai and Shenzhen exchanges, in its benchmark Emerging Markets and All Country World indexes. After a second round in September, more than 200 large-cap Chinese companies will be included. They will still comprise less than one per cent of the MSCI Emerging Markets mega-index, but if all A-shares eventually are included, they will amount to one-fifth of it. Even this year, tens of billions of dollars will flow into Chinese markets thanks to the relatively tiny MSCI window opening, which could well get bigger.
Of course, access to a growing market is tempting, but it’s not worth much if that growth tanks. Could that happen? Sure. But while there are plenty of higher-profile fears over China (a credit/investment bubble, zombie companies, poor governance) one of the oft-overlooked challenges to its economic prospects is simply that, as a country, it’s likely to start shrinking, and relatively soon.
In fact, Chinese population growth has been slowing for decades, and in 2016 was at a mere 0.54 per cent. The World Bank estimates the population will peak in about 10 years and then begin to decline; by 2040, the Bank expects, it will have fewer people than today. That trend has already hit its labour force: as the general population has aged, the number of workers in China plateaued throughout this decade, and in 2016 it began to shrink. In 2017, there were nearly 30 million fewer workers in China than there were in 2015.
For a country whose remarkable economic story over the past four decades has been fuelled by an abundance of labour, that looks like a big challenge. And the government clearly recognizes it. One sign: this week, Bloomberg reported that the administration was considering scrapping its 40-year-old policy of limiting the number of children a family could have, perhaps as early as this year.
If it does, then the Xi Jinping regime will be ending one of the longest-running governmental human rights abuses in the post-Second World War era, one that has also contributed to the demographic challenge the country now faces. The birth limits have already been weakened, of course: in 2015, China raised the allowance from one child to two, which encouraged a spike in the birth rate in 2016. But births declined last year, suggesting more radical reforms might be needed.
As more Chinese move to cities and adopt middle-class lifestyles, they are likely to have fewer babies, not more. If an economy is going to have fewer workers and still grow fast, it needs to get a lot more out of them
If that happens, any hope of maintaining anything like China’s historical growth rates comes down to one factor: productivity. If an economy is going to have fewer workers and still grow fast, it needs to get a lot more out of them.
Yet here, the Middle Kingdom presents a classic glass-half-full/half-empty situation. On the glass-half-full side, labour productivity in China is only 15 to 30 per cent of the OECD (developed country) average, according to a 2016 McKinsey estimate, so there’s plenty of room to become more productive as it technologizes and urbanizes. Spurred by growth in IT and a rising middle class, the transference from an investment/manufacturing-led economy to a consumption economy could see a rise to western-ish productivity levels.
On the glass-half-empty side, labour productivity is only 15 to 30 per cent of the OECD average!
How much the Chinese government really allows its economy to open up while getting out of the business of unproductive investment will make a big difference in the long run, both to China’s economic potential — which is huge — and to investors who might now be tempted to get in.
But for now, at least Chinese families might soon be allowed to have as many babies as they want, which is a perfectly mundane notion in just about every other place in the world. And maybe that’s a good way to start.