By John Ventre
New technology, the internet, global trade agreements – a lot has happened in the past 10-15 years to alter the world economy. But arguably the single most important event has been the arrival of China as a major industrial economy.
In 1998, the year of the Asian currency crisis, China was still a negligible 3.4% of the world economy and most people thought the so-called ‘Asian tigers’ – Korea, Singapore, Thailand, Hong Kong, Indonesia – were the future. Almost exactly two years ago, on 14 February 2011, the BBC reported that China had overtaken Japan as the world’s second economy. It marked what has been by any measure an extraordinary transformation.
In the process of its re-invention, China has increased its per capita GDP 20-fold and accumulated $3.3trn in currency reserves, a third of the global total. It has become the banker to its main customer, the US, owning $1.2trn, or 7.5%, of the US federal debt. By 2017, according to the IMF, China will account for some 14% of global output. In the same year the US – which made up a third of the world economy in 1998 – will account for around 20%. By the end of last year, the US National Intelligence Council was predicting that China will be the world’s largest economic power by 2030.
Two criticisms are commonly levelled at the Chinese growth model. One is that its demographic profile has been seriously skewed by the one-child policy, with the result that its fertility rate has already peaked and that the population is ageing. This suggests that China’s economic trajectory has passed its peak as fewer young people come into the workforce. It will turn from an emerging to a submerging economy, following the path of Japan, its neighbour and increasingly its geo-political rival.
The second and in some ways related criticism is that China is trying to veil its long-term Japanisation through spending its enormous reserves on state-sponsored capital projects that have little real long-term economic or social value. The suspicion is that these projects are of an ilk to the bridges-to-nowhere that the Japanese built in their unsuccessful attempt to buy their way out of their own long-term decline.
I don’t believe these are valid criticisms. China is different because of urbanisation. China is effectively in the middle of an industrial revolution. The years of Maoist Communism locked Chinese society into an economic model of agrarian subsistence. The Great Leap Forward was in reality a great leap backwards. Instead of turning China from a feudal to an industrial economy, as he intended, Mao Zedong entrenched a structure of isolated rural family-based agricultural smallholdings. It was not until 1978, with the rise to power of Deng Xiaoping and the development of the so-called ‘socialist market economy’ that China began to modernise in any meaningful sense.
Since then, China has seen the greatest migration from countryside to cities known to history. In 1978 the urban population was 18% of the total. Today it is nearly 50%. Between 2000 and 2011, China built 26 cities. In eight years, from 2003 to 2011, it increased its urban footprint by 54%, from 28.3k km2 to 43.6k km2. Is the growth over? Unlikely. The rate of change, looking at current United Nations statistics, peaked in 2000-2005, when the urban population grew at an annual rate of 3.4% and the rural population fell at an annual rate of 2.2%. The current rate of urban increase is 3% and rural decline 2.5%. By developed world standards, these are strong numbers. Urban growth in the US 2000-2005 was less than an eighth the rate in China, at 0.4%, a rate that has now fallen to around 0.3%.
Criticism of China’s investment in urban development and infrastructure misreads the way economies naturally evolve. No state, not even the archly capitalist US, has ever left its highway construction to private enterprise. The UK, Germany, France, US and Japan have intermittently invested vast sums of public money in railroad, and most still do. Between 1949- 1980, the UK built dozens of towns from scratch on public funds with little clear idea of who would populate them – examples include Basildon, Harlow, Hemel Hempstead. Similar lists could be compiled for other European states as well as for Japan. The transformation of China in the past 30 years has been enormous, a phenomenon of world-historic proportions. The trajectory of change is itself changing. The rate of growth is moderating and new growth is increasingly likely to come from the rising urban middle classes. But if it is changing, and to some extent slowing, it is still far from over.
John Ventre is head of multi-manager at Old Mutual Asset Management
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