In part four of his speech at the Global Investor Conference, Li Lu (Trades, Portfolio) discussed common reasons why overseas investors are pessimistic about China. He then addressed the concerns of foreign investors.
Li firstly addressed the changes at the government level. The Chinese government is in the midst of its most comprehensive anti-corruption campaign, which has lasted for more than six years and is still ongoing. The government has issued a series of reform plans and implemented two parallel policy objectives at the same time. The first goal is to strictly discipline the government to strengthen the control of the whole country. The second goal is to continue to aim for medium to high speed and sustainable economic growth for China at the same time.
Most people focus on the first goal, because it has brought about great changes affecting all bureaucracies, intellectuals, businessmen and citizen. Many government officials have found it difficult to adapt to the new reality of the comprehensive anti-corruption campaign. This has caused some government officials to act in a disorderly fashion. Companies and consumers lost some confidence, and the financial market fell sharply in 2018. This is the background of the "black swan incidents" in China in 2018.
The outbreak of the U.S.-China trade war in this period made it worse. Internationally, a new wave of "the collapse of China" theory become popular again. The theory was first brought up by Gordon Chang in 2001. This prediction has been repeatedly mentioned by well-known foreign newspapers and magazines, entrepreneurs and politicians every few years. Even within China, some people hold this view. Recently, there has been a new wave of pessimism and a new round of prediction of China's imminent collapse. Those who hold this view doubt the ultimate goal of the governance reforms and their ability/intention to reform and further develop the market economy. However, the real question is, would it lead to the end of China's rapid growth?
Li believes that strengthening the government's leadership has also brought about a more stable government and a more unified market. The anti-corruption campaign has also made steps towards curbing corruption such as rent-seeking and deep-rooted interest groups and made some economic reforms possible that were previously difficult to implement. We have also seen that China is continuously increasing investments in technology, education and the environment, and China's economy is transforming from export-and-investment-driven to consumption-driven.
In recent years, we have seen a lot of social changes. In some aspects these policies have also been effective, such as poverty alleviation and environmental protection. This is the change of China's domestic environment in recent years.
Internationally, many people ask whether the U.S.-China trade war will put an end to China's growth cycle. Here, Li Lu (Trades, Portfolio) showed the data of the percentage of China's net exports of goods and services to GDP, which was calculated by subtracting the value of imports of goods and services from the value of exports of goods and services, then dividing by total GDP. For some time in history, China's net exports were very high, close to 9% of GDP. It used to be as low as -4%, but over the past five years, China's average net exports has been around 2%.
The influence of international trade on China's economic growth has changed in recent years. Li Lu (Trades, Portfolio) showed the contribution of final consumption, investment and net exports of goods and services to China's GDP growth since 2003.
More than a decade ago, net exports contributed significantly to China's GDP. But it began to decline in 2008 and 2009, when China was a major importer supporting the rest of the world's economies. Over the past five years, the contribution of final consumption has continued to grow, with a relative decrease in investment and a significant decrease in net exports. In other words, China's economy has become significantly less dependent on foreign markets. China's supply side economic reform has produced practical results.
Even with all kinds of worries, fears, complaints and pessimistic predictions, China's economy is changing to a healthier and more sustainable mode. In 2018, the consumption's contribution to GDP growth reached 76.2%, while contribution of investment was 32.4% and the contribution of net exports of goods and services was -8.6%. The trade war between China and the United States will certainly have negative effects on China's economy, but it is not enough to stop the sustained growth.
It is true that there are certain factors negatively affecting China's economy, but there are still many growth drivers as well, so investors shouldn't be pessimistic about China's long-term growth.
Read more here:
- Li Lu Explains the Case for China - Part 4
- Li Lu Explains the Case for China - Part 3
- Li Lu Explains the Case for China - Part 2
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