Originally published in Stephen Dover’s LinkedIn Newsletter Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
For many Westerners, China is an enigma. Its language, culture and history remain mysterious for many outside its borders. I was fortunate to be one of the first Americans to live and study in China in 1982 and to travel, work and invest in China over the past 40 years.
Here, I focus on five myths about China’s economy and its financial system. In offering more realistic assessments, my hope is to help investors better judge the opportunities and risks of investing in China.
Myth #1: China is an export-led economy
Perhaps the greatest myth about China’s rapid modernization and economic development is that its growth has been “export-led.” That is a stretch, even if it is the case that all successful major economies in history—including China—owe much of their economic achievement to active engagement in international trade. Exports and imports provide access to bigger markets, know-how, cheap inputs and vigorous competition, all of which underpin economic success. However, China’s economic transformation owes far more to the successful adoption of a market-based domestic economy and to its vast mobilization of savings for investment.
China’s export share is rather modest at 19% of gross domestic product (GDP).1 That’s roughly the same proportion as Brazil or India, and only slightly higher than Japan. China’s export-to-GDP ratio is a full ten percentage points lower than countries such as Canada, France, Italy, South Africa, Turkey or the United Kingdom. China exports less as a share of GDP than Russia (25%) or than the average low-, middle- or high-income country worldwide. It is only in comparison to the United States, where exports account for just 10% of GDP, that China could be labeled as ”export-led.”2
China is the world’s largest exporter by value with over US$2.7 trillion in merchandise exports last year, edging out the United States.3 One in 10 goods and services exported globally comes from China. But the sheer dollar value of China’s hefty exports merely underscores the basic point: China exports a lot because it is a large economy, yet its domestic economy nevertheless dwarfs its exports.
China’s road to economic success began in 1978, when Deng Xiaoping introduced market reforms, which unleashed a vast mobilization of savings to finance investment. Guided by market forces, the Chinese economy began to flourish. But where China is truly a behemoth is in domestic savings and domestic investment, each of which make up more than 40% of GDP, roughly double the proportion seen in most advanced economies.4
Investment in housing, transportation and energy infrastructure, alongside manufacturing, have been the key drivers of China’s five-decade long growth spurt. In the first three decades of China’s rapid development, both capital accumulation and rapid productivity growth underpinned rising living standards.
Over the past dozen years, Chinese productivity growth has slowed—as it has in most countries around the world. In addition, concerns about excessive investment and slowing world trade growth are causing a re-think about China’s strategic growth plans.
