After spending much time on the background facts and information regarding China's geography, culture and economic policy, Li Lu (Trades, Portfolio) laid out the big drivers for China's economy for the next decade and more in his speech at the 2019 Global Investor Conference. This might be the part that interests the investors the most.
The first big driver of China's economy is Li Lu (Trades, Portfolio)'s "law of modernization," namely the combination of a market economy and modern science and technology, which is the foundation of modern civilization and has little to do with political structure.
Technological growth is directly related to economic growth. China will be benefiting from an influx of scientific and technological talents. In 2018, there were 7.5 million college graduates in China, of which 4.7 million were STEM (science, technology, engineer and mathematics) majors. In contrast, the number of STEM graduates in the U.S is about half a million, only one tenth of the sheer numbers in China. In 2021, China is expected to have nearly 200 million college degree workers, so China is set to enjoy a huge talent pool for engineers.
A similar situation happened in early 1978, when hundreds of millions of young people from rural China moved to big cities and were willing to work hard no matter how hard or easy their jobs were and how much they were paid. China's economic take-off in recent decades has benefited from the vast amount of cheap and high quality rural migrant workers and the job opportunities brought about by globalization.
Today, China is on the cusp of enjoying the economic and technological transformation brought by a huge increase in engineers. Huawei alone employs about 150,000 engineers, all of whom have at least a bachelor's degree in engineering, and most of which have a master's degree or above. Huawei pays about a fraction of the equivalent in Seattle or Silicon Valley, but its engineers are known for their hard work, and their living expenses are undeniably far cheaper than the more expensive areas in the U.S. This is the competitive potential that China is about to release - a talent jump that the U.S. has already been through.
Another way to think about the benefit of a rapidly expanding pool of engineer talents is to compare the GDP per capita and R&D expenditure as a percentage of GDP in. In 2018, China's per capita GDP was about $10,000. In terms of per capita GDP, China is comparable to Brazil, Mexico and Thailand. But China's R&D spending as a proportion of GDP was 2.13%, which was much higher than any of these countries. By comparison, Brazil's R&D spending as a proportion of GDP was 1.27%, Thailand was 0.78% and Mexico was only 0.49%. China's R&D spending as a proportion of GDP is even higher than that of Spain and Portugal. The per capita GDP of Spain is three times that of China, and that of Portugal is twice that of China. In other words, China's R&D expenditure as a proportion of GDP is higher than those countries whose per capita GDP is twice or three times that of China, and far higher than those countries with the same level of per capita GDP as China.
The second big driver of China's economy that Li highlighted is the higher future urbanization rate. All countries with high per capita GDP and high R&D spending have urbanization rates of around 70%, compared with 55% in China in 2019. China's urbanization rate is somewhat overstated because it includes 180 million migrant workers who live in cities but do not have urban resident permits. Only those with urban resident permits are entitled to a range of social benefits, including education, retirement and medical benefits. Therefore, these 180 million migrant workers are not full participants in urban life.
The Chinese government plans to improve the urbanization rate at an annual rate of 1% in the next 20 years, which means that about 300 million people will become new urban consumers in the next 20 years. That's what it's all about to be part of the urbanization process - to be a consumer. Urbanization puts more money into circulation in the economy, creating sustainable economic growth.
The third big driver for China's economy is the high savings rate, because China needs enough capital to support urbanization, construction and manufacturing. It is very interesting that, in recent years, even though the consumption level has risen sharply, the savings rate has also increased. In 2018, as the world's second-largest economy, China's savings rate was still as high as 45%. A high savings rate is a great support for further consumption and investment.
A high savings rate would also address one of the concerns of many people - high debt levels. China's debt level has been rising since 2008, when China began to invest heavily in infrastructure in response to the global economic recession triggered by the U.S. subprime mortgage crisis. This massive stimulus was done mainly by printing money and issuing debts. Traditionally, China's social and private financing relies heavily on bank loans, sometimes as high as 80-90%. Equity financing could only provide a small portion of capital need. Both unlike many other developing countries, China's debt and equity financing is backed by domestic depositors. Almost all the creditors of debts issued by Chinese entities are Chinese and the debts are issued in local currency. Therefore, although the debt to GDP ratio is relatively high, the possibility of a financial crisis is not as high as it would be if the country owed foreign creditors, at least for now.
The next step the Chinese government wants to take is to fundamentally change China's financing structure through capital market reform by greatly increasing the weight of equity financing and reducing the proportion of debt financing. The newly launched "Science and Technology Innovation Board" has adopted the same model as the United States, that is, the registration-based listing mechanics based on information disclosure, rather than the previous approval system. This means that any company that wants to be listed can enter the capital market in a relatively short period of time and obtain equity financing in a market-driven competitive way. The goal is to gradually adjust the societal financing structure and gradually reduce the reliance on bank debt financing because a complex and mature economy should not have such a high proportion of bank debt. Capital market reform will become the key to unlock the problem of the high debt ratio and improve financing efficiency.
Read more here:
- Li Lu Explains the Case for China - Part 6
- Li Lu Explains the Case for China - Part 5
- Li Lu Explains the Case for China - Part 4
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