Guest post on emerging markets: What about China?
Emerging Markets for Dummies author Annie Logue discusses China in her guest post. I’m happy to welcome Annie’s second guest post for this blog. Her first was “Talking to clients about social investing.”
She’s also giving away one copy of her book to one reader with an address in the U.S. who comments on her guest post. Be sure to input your email address, so she can contact you.
How can you say that China is an emerging market?
When I was working on Emerging Markets for Dummies (Wiley 2011), I had a question from my editor that probably nags at a lot of folks who are looking at international investing: How can you say that China is an emerging market when its economy is so big?
Well, yes, China is big. China has the third-largest economy in the world, behind the European Union and the United States, but it is nevertheless considered to be an emerging market. That’s for two reasons. First, China has the largest population in the world, so its economy per person is quite small. Divide China’s $8.2 trillion GDP by its 1.3 billion people, the result is a GDP of $6,700, ranked 130th in the world, right between El Salvador and Turkmenistan. Compare that to the United States, with a per-capita income of $47,400. (The US is ranked 11th internationally in GDP; Qatar is first at $145,300 – and it is also considered to be an emerging market because its leaders are working furiously to diversify the economy away from oil.)
To the average Chinese person, the country has a long way to go to be developed. Although the growth has been phenomenal, the nation has nowhere near the prosperity of the United States, Canada, or Japan.
Second, China’s infrastructure is still developing. For much of the 20th century, there was little spending on public works. In fact, some misguided political efforts such as the Cultural Revolution led to the destruction of perfectly fine schools and roads. Modern China needs roads, schools, electric power lines, airports, and all of the other niceties of a modern nation. The major cities are mostly set right now, but the nation’s vast rural areas are playing catch up. Beijing reaped the architectural rewards of the 2008 Olympics, but it has only 22 million people. More than a billion other Chinese are living in places without spectacular public parks and swimming pools.
When looking at China and India in particular, their national accomplishments have to be considered in the context of their massive populations. The CIA World Factbook, which is a great reference for anyone discussing emerging markets, says that only 61 percent of the population over age 15 is literate. To put it another way, India has more illiterate people than the United States has people.
It’s not easy to for an economy to be large enough to meet the needs of all of its people. China and India have a great deal of risk, despite their enormous progress. However, the creativity and hard work that goes into the attempt make for some great investment opportunities, even now.
I’ll give away a copy of the book to a random commenter with a US mailing address who responds to this post by March 1, 2011. Enjoy!
Interesting about infrastructure. I have a client who travels there and made a comment about how poor the roads and delivery system was. He didn’t understand why so much money was flowing to China when they’re clearly not keeping up from an infrastructure perspective.
Annie,
Your post is getting comments in LinkedIn’s CFA Institute Members group (http://www.linkedin.com/groupItem?view=&gid=38535&type=member&item=44693951&qid=bdec5fd0-a0fe-47a3-abe7-9209c4da0d53&goback=.gmp_38535)
Emerging suggests increased relevance, with the potential to become much more significant to developed – whether talking about talent, companies, industries, countries, or areas. Relevance can be game changing, with positive and negative impact on developed incumbents.
Living in South Africa, I would strongly suggest that everyone who considers themselves part of something developed should allocate a decent portion of their time to monitoring emerging markets, countries, technologies, etc. And do it properly – as your livelihood may depend on it.
I perceive, China is still an emerging market, until per capita productivity & consumption catches-up with that of developed markets. Also, the gap between rich and poor should decrease. Though it’s easy to notice rapid growth on east coast – Shanghai, Shenzen & Beijing, the inner provinces need considerable progress to make China transition from emerging to developed market category.
I normally don’t agree with Eng however in his post he made some good observations about the Communist People’s Republic of China. People forget that the “China price” comes with the Chinese pathologies. Much of its successful businesses are copy-cats of western ideas. They are so successful because they are been protected from foreign competition. I still have a lot of issues with the standard of human rights in China. Though China has come a long way in cutting down poverty rate, the impression that I get is in China is, if you are poor and a Mr or Misses/Ms Nobody, your life can be easily sacrificed. Look at the recent cases, babies been poisoned by milk, when those parents tried to seek redress, some of them were arrested.
If the US put trade parity tariffs on Chinese (and other emerging markets) imports (and follw that up with tax rate reductions for businesses (whether incorporated or not) whose operations are in the US) to account for the various social pathologies that come with using cheap, exploitable Chinese labor, then China’s economy would collapse within a few years.
That being said, China is a rapidly developing emerging market economy, due to the low level of per-capita GDP in comparison to other developed countries.
Both of your views, regarding per capita GDP as well as infrastructure, make sense in terms of China’s stratified “economies within an economy”. While cities like Shanghai, Beijing and Hong Kong are no doubt globally competitive economies, one does not need to venture far form these to experience a third-world environment.
The fact that China’s per capita GDP is so much lower than the US or anywhere else in the developed world is a message that most people in this country don’t seem to understand. Fears that China will soon overtake the US as the greatest world superpower ignore both the relatively poor living conditions for most Chinese citizens and, as Joshua Norman suggests, very little productive R&D comes out of China at this point. China has a long ways to go in terms of raising living standards and creating the right environment for innovation.
That said, the progress China has made in the past 35 years demonstrates that rapid improvements are possible. I see two keys to continued progress. First, the Chinese must avoid a prolonged period of stagnation or recession (such as Japan’s ongoing malaise). This is easier said than done, and the assets bubbles, particularly in real estate, lead to concern that a crash could be coming. Second, China must learn how to innovate by improving its education system to promote creativity, while bolstering intellectual property rights to protect any new ideas that are generated. If China can achieve both of these goals, then investors will face tremendous investment opportunities for many years to come.
Well, I go offline for the weekend, and everyone here gets busy commenting.
The progress in China is absolutely amazing, and it is likely to continue, but it can’t continue at the same pace. Being a low-cost manufacturer will only get you so far in the economic development game, and countries or regions that have relied on that as a long-term strategy haven’t thrived.
One of the things that fascinates me is the political climate, because the country is still officially a Communist nation. Before the British lease on Hong Kong expired in 1997, there was a lot of panic about how the economy would be destroyed by the Communists, with businesses moving their headquarters offshore and the professional class scrambling to get passports for other countries. And that panic was for nothing, in hindsight.
As the economy continues to grow, the risk of the government interfering gets smaller. The challenge is to find industries that add value.
Annie, if I may, “As the (Chinese) economy continues to grow, the risk of the government interfering gets smaller?”
In the US, as the economy and country grew, government interference has grown so much to the point where the federal, state & local governments consume 2 out of every 5 dollars produced in the US.
Michael, what’s interesting is that a Chinese fellow on the LinkedIn board admitted what I suspected was going on in China, i.e. poor living conditions and lack of original innovation.
Hi, everyone,
I’m a little late on the giveaway but did the drawing this morning. And the winner is . . . Michael Cumming!
Michael, email me your address (annielogue@gmail.com), and I will get a copy of Emerging Markets Investing for Dummies out to you in short order! (And if you don’t live in the U.S., then I will go back to the envelope and draw another name.)
Thank you, everyone, for your participation, and thanks so much to Susan for giving me this opportunity.
Annie
It seems predictable that China’s poor citizens will demand improved living standards as time goes on, including more services from the national government. Infrastructure growth may bode well for emerging market mutual funds with significant weighting in China, but should the prospect of increasing taxes dampen our enthusiasm? Can the largest income earners bear that burden?
China’s Inflation concerns also leave me puzzled. Surly that will greatly effect GDP growth.
Comments?
Margaret,
Thank you for your comment. It seems to me that China’s citizens are already demanding more.
I read in today’s newspaper that China has more debt than most people realize once you consider the debt of its state-controlled organizations.