China’s $5 Trillion a Year Growth Opportunity

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China’s $5 Trillion a Year Growth Opportunity

The year 2016 is the Year of the Monkey in the Chinese Zodiac calendar, and the monkey is associated with the personality trait of changeability.  The ability to change is precisely what the Chinese economy needs right now.

There’s no question that a focus on investment made sense when China was transforming itself from an impoverished Third World country into the world’s second largest economy.  Since 1980, it has elevated more than 600 million of its people out of poverty, primarily by creating jobs in factories and on infrastructure projects.

But, while China continues to pursue its investment-driven economic model, the signs that this approach no longer fits the country’s new reality are rampant: 

  • Last year, its GDP grew at less than 7 percent, the slowest rate since 1990, and down from 19 percent as recently as 2011.
  • The debt amassed by its non-financial corporations reached new heights at 136 percent of GDP, double the level of 2007.
  • The amount of fixed capital investment to produce one unit of GDP climbed 60 percent higher than the amount from 1990 to 2010.
  • China’s stock market lost half its value during the year.
  • Foreign reserves dropped by half a trillion dollars.

Factor in other problems we’ve covered extensively in Trends, such as China’s aging population, its shortage of women relative to men due to its disastrous one-child policy, and its wasteful spending on infrastructure that isn’t needed, and it’s clear that its economy is facing a catastrophe if it keeps following its current course.1

What’s the solution?  China must shift from its focus on investment to a focus on productivity.  The country has tremendous room for growth in this area:  Its labor productivity is a mere 15–30 percent of the average of the OECD countries. 

An economic model driven by productivity would stop investing in industries that are already overbuilt, and instead invest in businesses that are productive and driving job growth.  Rather than attracting more capital, failing businesses would be forced to shut their doors...

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