The People's Republic of China is the world's second largest economy, the world's
largest manufacturer and increasingly, a major player in international news.
But, VisualPolitik fans, despite this, it is still a very aloof and largely unknown country whose
image continues to be surrounded by great clichés and myths, which either never were or, at best,
no longer are reality. At least not entirely. What we are going to look at are three of the big
myths that always surround the Chinese economy. Three big lies or half-truths
that you have surely heard many times and that you have probably believed.
So... Let's get started. T1(MYTH 1: JUST ONE LARGE EXPORT FACTORY)
China has changed a lot over recent decades. Since Deng Xiaoping began the opening-up
process in 1978, China has experienced the biggest economic take-off in history.
Over the past 40 years, this country has averaged annual economic growth of nearly 10%
and its inflation-adjusted GDP per capita has increased more than 24-fold,
enabling more than 800 million people – that’s more than the entire populations of
Latin America, Canada and The Netherlands combined – to leave poverty behind.
And yes, it is true, in this entire evolution the export sector did play a key role,
but with 1.4 billion consumers and a middle class that includes more than 600 million Chinese,
the economy of this country goes far beyond that. C1("Perhaps the biggest myth about China's rapid
modernization and economic development is that its growth has been export-led [...] However,
China's economic transformation owes much more to its successful adoption of a market-based domestic
economy and its vast mobilization of savings for investment." Stephen Dover,
Head of the Franklin Templeton Institute) In fact, as Stephen Dover himself points out,
the weight of exports in China is barely 19% of GDP, a proportion similar to that of countries
such as Brazil or India, but much lower than that of countries such as Canada, France, Italy, or the
United Kingdom. And it does not even come close to Germany. The weight of exports over GDP in Germany
exceeds that of China by more than 25 points. Yes, in absolute terms China is the world's
largest exporter, almost 10% of all goods exported worldwide come from this country,
but this is because we are also talking about the economy of a huge country.
China does export a lot, but the real economic heart of the country lies in its local market,
specifically in its investment market, in its productive factors market,
in what is known as gross capital formation. To give you an idea, China saves and invests
locally more than 40% of its GDP, approximately double the usual ratio in Western countries.
Machines, cranes, apartments, dams, roads .... Investment in housing, transportation,
infrastructure and production centers have been responsible for
most of the country's economic growth. In fact, the main economic problems now
facing China have to do precisely with this feature. We are talking above all about
problems of overinvestment, mis-allocation of capital and low levels of productivity.
Precisely for this reason, for years the Chinese government has been trying
to boost local consumption so that its economic structure evolves towards a model
more similar to that of wealthier countries. In other words, if we talk about the prospects
and evolution of the Chinese economy, the key is not so much in its exports as
in its capital markets and productive factors. T2(MYTH 2: FOREIGN INVESTORS ARE FLEEING CHINA)
Okay, that the Chinese economy is not living its finest hour is an open secret: the trade war,
the pandemic, Xi Jinping's common prosperity campaign, skyrocketing energy prices, the real
estate crisis and the Covid Zero policy are all events that are hitting the Chinese economy.
However, despite this, it cannot be said that foreign investors are leaving en
masse or that it is the government itself that is restricting foreign investment.
It is one thing to freeze an investment project or move it to another country in
order to seek greater diversification of production chains, but quite another to
retrace the path followed in recent decades. And keep one thing in mind: today there is no
alternative to China. In fact, pay close attention to what happened in 2020:
N1(25 January 2021: China moves towards world
leadership: overtakes the US for the first time as the main destination for
foreign direct investment. The Economist) And then in 2021 it once again recorded the
largest FDI, foreign direct investment, inflow in its entire history. One out of
every five dollars of direct investment worldwide went to this Asian giant.
What’s more, the Chinese government not only does not reject foreign investment,
but they are very clear that they need it. Proof of this is that, in recent years
Beijing has been opening more and more sectors of its economy to foreigners and has also made
it easier for international companies to have 100% controlled subsidiaries in the country.
For example, as we have told you here on VisualPolitik, in 2021 the Chinese government
authorized US investment banks to operate in the country with wholly owned subsidiaries.
It is true, however, that the Covid Zero policy is dealing a severe blow to this openness,
not least because it is closing the country's borders to human capital, however it is understood
that this can only be temporary. That, at least, is the expectation.
T3(MYTH 3: CHINA RIVALS THE UNITED STATES ECONOMICALLY)
The third and last great myth has to do with China's economic power and
its ability to look the United States in the eye. The World Bank estimates that the Chinese economy,
adjusted for the price differential, is already above that of the United States.
However, that can lead to a huge misunderstanding.
You see, China has advanced in leaps and bounds but the gap between it andits distance from the
richest countries is still galactic. In fact, we are talking about a
country that still cannot be considered wealthy. According to World Bank data,
its GDP per capita is just over $10,000 dollars, which is a quarter of the GDP
per capita of the European Union and barely 20% of that of the United States.
And let’s not forget that this is what determines
its purchasing power and international investment.
The Chinese economy is very large because we are talking about the most populated
country on the planet. Approximately 1 out of every 5 inhabitants of the earth are Chinese.
But of the 1.4 billion people that we can find in the People's Republic of China, only 600
million could be considered middle class. In addition, GDP is a crude indicator that
presents many problems: it does not measure productivity, consumption
of productive factors or surplus production, which is ultimately what determines wealth.
This is what explains why, according to Credit Suisse data, the wealth gap
between US families and Chinese families has widened by $12 trillion since 2011.
We also have to take into account that we are talking about a very large country with
many differences, not only in terms of population, but also in terms of
territory. Unlike the large coastal cities, the inland areas are still relatively poor.
In short, China cannot be considered a wealthy country, nor does it seem that,
at least for now, it can match the economic clout of the United States.
So there you have it, these are three big myths about the Chinese economy
that are repeated again and again in many media outlets and in many
passing conversations. So from now on, keep an eye on them. But having
come to this point, it's your turn: Do you think China will recover from
its recent economic problems? Have you ever considered selling or investing in the Asian
giant? Leave us your comments below. And now, if you found this video interesting don't forget
to like and subscribe to VisualPolitik. Many thanks to our friends at Value School for their
collaboration in preparing this video. All the best and see you next time.