China: The New Land of Opportunity

(exfordy)

Once destined for stagnation and communistic despair, China has produced truly breathtaking economic growth over the last several decades. Indeed, it is difficult to exaggerate just how much – and how quickly – the Chinese economy has grown. At a time when most major economies are struggling to catch their breath amidst a recession, Bloomberg warned on January 11, 2010 that China risked “overheating” with forecasted 2010 growth rates as high as 16%. Many eyes widened when China embarked on a massive stimulus spending spree (4 trillion yuan, according to BBC) to offset slumping imports, but in December of 2009, Bloomberg says that, “…China’s exports grew 17.7 percent from a year earlier.” However, the story of China’s ascension as an economic powerhouse began long before the current financial crisis, or even the decade of the 2000’s. In his book Applied Economics, Thomas Sowell writes that, “…as of 1991, India and China had very similar output per capita.” Nevertheless, just a decade later, “…China’s output per capita was double that of India’s.”

Nor did China merely grow relative to its neighboring nations, as China now boasts the second highest GDP in the world (as measured by purchasing power.) The primary driving force behind this historic explosion of economic growth, Sowell observes, was a radical shift in economic policy – specifically, “…a process of moving away from a government-run economy to more of a market economy.” Time Magazine concurs that China, “…only started growing when the overbearing government got out of the way and allowed private enterprise, both Chinese and foreign, to thrive.” The lifting of government restrictions on international trade and foreign investment have transformed the Chinese economy to a degree representing a night and day difference between today and just twenty years ago. Today, China is the world’s second largest economy – a meteoric rise for a country whose population of 1.3 billion was not long ago doomed to starvation.

In continuation of our series on growing economies, we’ll break down China’s economic landscape – the opportunities, government incentives to producers, fast-growing industries, and what the future holds.

The Opportunities

Much of China’s economic expansion has been the result of inexpensive exports, which are happily consumed by the rest of the world. And a significant portion of this activity has involved trade with the United States. USAChina.org displays a table showing that US imports of Chinese goods has risen every year during the last decade – beginning at $81.8 billion in 1999 and ending at $337.8 billion in 2009. While Chinese imports of US goods have also risen year to year during the same time, the increase is far less pronounced: $13.1 billion in 1999 versus $71.5 billion in 2008. Staggering as Chinese exports to the US are in isolation, the US is hardly the only source of demand for Chinese goods. Exports to the entire world rose from $194.9 billion in 1999 to over $1.4 trillion by 2008. USAChina.org also broke down the goods most frequently exported by China in 2008 – to the entire world – as follows:

1. Electrical machinery & equipment ($342 billion)
2. Power generation equipment ($268.6 billion)
3. Apparel ($113 billion)
4. Iron & Steel ($101.8 billion)

(myuibe)

Such numbers indicate opportunities in each of these industries, which benefit from tremendous and growing demand from the rest of the world – especially the United States. Various investors also spot growth opportunities on the Chinese stock markets. Foremost among these is Warren Buffet, who Motley Fool quoted in 2008 as saying:

“The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly.”

As far back as 2006, AIGA.com remarked on the branding opportunities available in China now that the government there has become more permissive of foreign investment. Citing a massive influx of foreign activity after China joined the World Trade Organization in 2001, AIGA comments on a report by Bernstein Investment Research & Management stating, “…China will produce world-class brands and they will challenge incumbents in China, and around the world.” Bernstein also discussed a broader “…impetus to position Western brands within China itself.” Sure enough, American and European franchises have found that their products and services, “…are especially appealing to younger Chinese”, while, “…older Chinese consumers are fiercely patriotic, and want to buy native brands.”

Another growth area appears to be precious metals, which NuwireInvestor.com claims are needed to support China’s continued growth. For instance, China, “…has been by far the largest importer of platinum and palladium over the past 12 months”, as of October 2009. ChinaMining.org likewise quoted Christopher Parker of Brook Hunt as saying, “…like it or not, China has truly become the most major force in the world of zinc.”

The Incentives to Producers

The greatest incentives to Chinese producers (domestic and foreign) have been the general trend of government easing up on various trade and investment restrictions, which limited that country’s growth for many years. Back in 2006, IncentiveMag.com dubbed that year, “…the year of the carrot” because of the various incentives that were made available for doing business domestically. While China was once seen, “…first as a source of cheap labor”, foreign businesses see China, “…increasingly now as a viable market in its own right.” Although China once consisted, “…merely of big multinationals and cheap outsourcing”, smaller US companies, for instance, “…have begun to set up shop” because of reduced complexity, bureaucracy and startup costs.

(cogdogblog)

Various industries have been targeted specifically with unique incentives of their own. The auto industry is a recent example. In December 2009, the Wall Street Journal reported that that Chinese government would be, “…extending a purchase tax cut on smaller passenger vehicles”, as well as, “…expanding subsidies for alternative fuel vehicles, purchases in rural areas and for consumers trading in older cars.” On top of that, the government, “…halved the sales tax on vehicles with 1.6 liter engines or less” to 5% – a move that the Journal suspects helped put the Chinese auto market, “…on track to surpass the US” in 2009 in terms of higher auto sales volume. ChinaInvestor.com reported in October 2009 that China had launched a portfolio of incentives aimed at increasing solar energy production. Specifically, the Chinese government is offering to, “…subsidize the costs of installing solar energy systems on buildings.”Another proposal calls for the government to offer “…up to 20 RMB ($2.93) per watt for solar-panel installations that are 50-kilowatt or larger”, which could pay for, “…50%-60% of a system’s installation cost.” Still another program (called “the Golden Sun”) involves the government paying half the cost of building, “…grid-connected solar projects, and up to 70% for off-grid projects in remote areas.”

More broadly, Chinese companies benefit from paying a flat corporate tax rate of just 15%. By comparison, the U.S. assesses corporate income taxes of anywhere from 15%-35% on C Corporations, depending on the income earned.

The Future

In addition to its frenetically paced growth, China’s economic fundamentals appear strong. The 2009 Legatum Prosperity Index states that, “…unemployment in China is at 4%, and this, coupled with a relatively low inflation rate of only 5%, inspires reasonable confidence in the economy.” Also, despite China’s rapid and continuing growth, the country’s domestic savings rate is the, “…third highest globally”, at 53% of GDP. Additionally, China has produced double-digit GDP growth in each of the past ten years. China ended 2009 on a high note, with the UK’s Times Online noting that the country’s GDP rose, “…by 10.7 per cent in the fourth quarter compared with the final three months of 2008.” While the Times cautioned that China is still burdened by its growing population, it appears as though world markets are rapidly absorbing Chinese labor for increasingly productive and profitable uses. In a similar vein, BusinessWeek stated on January 22, 2010 that retail sales rose over 16% last year (after adjusting for consumer price changes) – the largest such rise since 1986 – which prompted BusinessWeek to conclude ,”…the world may again this year count on China as the biggest engine of growth.”