By Corinne Taverner, BBC News, EurActiv
China will have nearly a third of the world’s economy by 2030
China is about to overtake Japan as the world’s second biggest economy – with a market worth $10.7tn. Whether investors are buying into its possibilities, or thinking it is a shadow of its former self, is another question. The lessons are there though.
If you look back to just six years ago, China was struggling to get out of the growth trap of opening up quickly at the wrong time, to fend off a potential bubble. These same concerns are being revisited. If you were thinking about investing in China back then, there was a lot to be said for patience. Remember, China was just a baby then.
Three things happened to China between 2013 and 2015. First, it moved away from a focus on exports and fixed asset investment, to one on consumer spending and services. It moved to a more productive labour market, with 50% more part-time workers. We are now starting to see the benefits of these moves.
The second change was in the balance of power. According to the International Monetary Fund, the World Bank, and the United Nations, China accounts for half of world trade, up from 25% 10 years ago. The third change was that China started to make the transition from manufacturing to service based companies – to business services, and to financial services.
Read more: Why China wants to dominate electronic gadgets
For an investor taking a long term view it is already starting to pay off. Take Hainan Airlines as an example. Despite being state owned and running for over 100 years, they have already notched up US$50bn in sales. And what do these profits look like? They are made on an annualised rate of 45% with good margins.
India is on track to overtake China to become the world’s fastest growing economy. India is thriving in a part of the world that China has failed to reach. While China benefits from a powerful consumer base of 1.4bn people – 2.5% of the global population – India benefits from a population of 1.2bn.
India’s population is also five times that of China. India’s mobile population is more than four times that of China. Indian farmers are eating better – double the income of Chinese farmers. And that is important because urbanisation in India and China is the driving force. What happens in India will not only have a ripple effect on developing countries but it will transform the way in which world trade is conducted, and a developing world that relies on the rest of the world.
Read more: Why investors should be wary of India
Of course, there are dangers. The risks of investing in China – no matter how robust or sustainable the Chinese economy looks – are enormous. In the most extreme scenario there could be severe, hyperinflation with tremendous instability. The risks of a war are the same as they are for all of us. That is one of the most serious issues confronting the Chinese economy. What can you do to protect yourself?
Well, there is good news on that front. Empirical research has shown that one should aim to invest in the world with the most important threats to the stability of global markets, and that is in emerging markets. These are the most sensitive to market globalisation and to changes in macroeconomic conditions. They are also on the point of huge economic growth – and many with very good operating margins.
So what to do?
Read more: Why investing in Indian stocks is a must
Unfortunately at the moment emerging markets’ growth is having a negative effect on their economic output. But it is probably reversible. That is why the ratio of investing in Chinese to emerging market equities – on a risk-adjusted basis – is actually rather high: about five to one.
So if you do want to take a long term view on China, there is no doubt about the potential – but there are risks.