If China is ok, the world economy is ok
About 35% of the world’s GDP growth will come from China this year. “China is simply too big to ignore,” says Mark Matthews, Head of Research in Asia. In the interview, he explains why China doesn’t have to be too much worried about the trade conflict with the US and how it wants to become a high-tech powerhouse.
Asia’s role in the global growth picture
Mark Matthews: “I’m sure readers are getting sick of hearing this term, but we are in the midst of what economists call ‘synchronised growth’. The interesting part of this growth – if you look at our chart of world GDP growth – is how much of it is coming from Asia. About 35% of the world’s GDP growth will come from China this year, twice as much as the US, despite the fact that China’s economy is only two-thirds the size of the US. But we can also see that India, which is only 3% of the world economy, contributes almost 9% to world economic growth. Indonesia, an even smaller part of the world economy, chips in 2.5% to world economic growth, which is more than Canada or Australia contributes.”
The GDP of Shanghai is the size of Holland’s
“We have two reasons for this. The first is, China is simply too big to ignore, and if we had been discussing this ten years ago, I would have said that China’s economy was a USD 3 trillion economy. Yet by the end of this year, it’s going to be a USD 13 trillion economy and this year, for the first time in literally hundreds and hundreds of years, China’s economy will surpass that of Europe’s in size. I can name cities in China that today are economically of the same size as entire countries in Europe. For example, Shenzen’s economy is the size of Sweden’s, Holland’s is the same size as Shanghai’s, Beijing’s is the same size as Switzerland’s. The Swiss are probably very happy if they get about 2% GDP growth per year, but Beijing is growing at least at 7% per year.”
Source: Bloomberg Finance L.P., World Bank, International Monetary Fund
How China is rapidly climbing up the value chain
“The second thing is that China is very, very rapidly rising up the value-added chain, and the key phrase in Beijing these days is: We don’t want to grow old before we grow rich. So this is where ‘Made in China 2025’ comes in, a big initiative – probably their biggest initiative since the foundation of the People’s Republic – to become the world leader in ten sectors by 2025. And the results are really before our eyes. Two years ago Alipay replaced Visa as the largest online platform in the world, and China is already the world leader in many sectors – from digital payments to household appliances, to artificial intelligence, big data, high-speed trains – so that’s another reason to like it.”
The removal of the two-term limit for President Xi Jinping – is it good or bad?
“Of course, we could say this is a bad thing, but I would point out that Britain, Germany, Canada, Italy, Denmark, Spain, Sweden, Holland, Japan and India have limitless terms of government. Clearly, people are worried about China because it’s not the same style of government, it’s a communist state, not a democratic state. But regardless of what one might think of their form of government, one has to admit that they are pursuing a huge social, political and economic project, and one that is largely successful. So, would Xi Jinping be president if the country were a democracy? I don’t know the answer, but probably not. Does that mean they don’t like him? No, they actually do like him because he’s doing good things. He’s a competent leader.”
Trade frictions and their impact on China
“From a US perspective, the tensions make sense because China accounts for 60% of the US trade deficit, up from about 20%–25% the year before it signed up to the WTO. And the US does sell planes and cars and soya beans to China, but frankly not a lot else, so I can understand why this has become an issue. What can they do about it? Well, China could buy more natural gas from the US, the US could buy more telecoms equipment or computers or apparel from other countries, but frankly, it’s difficult to see them materially changing this imbalance. So, in a worst-case scenario – let’s assume 160 billion dollars of goods that are taxed with new tariffs and a decrease in US demand of about 10% – you’re still only shaving about 0.08% off of the Chinese economy. And the fact is, as I said earlier, this is a USD 13 trillion economy – it doesn’t really need the rest of the world anymore.”
Opportunities in other Asian countries
“I see an opportunity in the Japanese banks. The Bank of Japan’s governor, Haruhiko Kuroda, recently said that they were having internal discussions on how to exit their ultra-loose monetary policy. The banks in Japan are the cheapest banks in the world. They trade on about 0.5 and 0.7 times the price-to-book ratio because they have the lowest net interest margins in the world – about 0.15%. Why would you buy a bank with almost no margin? But the margins will improve if they do normalise monetary policy and interest rates do rise, and so I think there’s an opportunity in that space right now.”