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China’s Place in the World

The opportunities and implications of its rise

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REMARKABLE CHANGES

China rising

By some measures, China is still a developing country, but it has grown considerably in recent decades. In fact, since 1990, China has made remarkable advancements in the key indicators of a modernized society. These advancements hint at long-term investment opportunities.

Five indicators of a modernized society

This graphic shows that while China is still a developing country, it has made remarkable advancements in the key indicators of a modernized society.

1. National Bureau of Statistics of China, 2018 China Statistical Yearbook, December 2018
2. World Bank, Poverty & Equity Data Portal, December 2018. International poverty line represents a value of $1.90 per person per day
3. National Bureau of Statistics of China, 1999 and 2018. China Statistical Yearbooks, December 2018
4. Central Intelligence Agency, The World Factbook, December 2018
5. Central Intelligence Agency, The World Factbook, December 2018

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CHINA’S FUTURE GROWTH

The next phase

Two large undertakings—Made in China 2025 and the Belt and Road initiatives—are driving the next stage of China’s growth and long-term development.

Made in China 2025

Beijing is implementing policies aimed at pivoting the economy away from investment and manufacturing-oriented growth and toward innovation and services-oriented growth. As part of this process, China has signaled a desire to make its economy less reliant on foreign commercial partnerships and give more preference to domestic innovation and industry. Here are the three core tenets of Made in China 2025.

This graphic shows the three core tenets of Beijing's Made in China 2025 initiative aimed at pivoting toward innovation and service-oriented growth.

 

Innovate & Localize

  • Increase homegrown technology
  • Use onshore global supply chains

Substitute

  • Reduce reliance on foreign high-value goods
  • Increase domestic consumption of homegrown technology

Increase global market share

  • Develop market-leading technologies
  • Acquire international brands to increase market share

The Belt and Road Initiative

This plan will create trade routes that will secure the resources needed for China’s homegrown wares and feed an increasingly affluent population. Sometimes called the New Silk Road, this initiative will create a “belt” of overland routes and a “road” of maritime routes.

Map of the Belt and Road Initiative — which is also known as New Silk Road Plan — that will create overland routes and maritime routes in China.

Source: Wells Fargo Investment Institute, December 2018

WHEN SIZE OF CHINA’S ECONOMY COULD SURPASS U.S.

China vs. the U.S.

Assuming that the current pace of economic growth in China evens out at 6.5% (compared to a long-term average of 15%), we estimate that the size of its economy could match the U.S. in less than 20 years.

GDP growth forecasts: China vs. the U.S.

The absolute size of China’s economy is likely to surpass that of the U.S. before its per capita wealth does.

This chart shows the size of China's economy matching the U.S. in 15 years, though its wealth would continue to lag behind the U.S. on a per-capita basis.

Sources: Wells Fargo Investment Institute and Bloomberg, as of October 19, 2018. Forecasts are based on certain assumptions and on views of market and economic conditions which are subject to change.

China lags in key areas of development

Measures of infrastructure development suggest China must develop further in order to reach its desired level of prosperity.

This chart shows China has made strides but is still behind the U.S. in areas of infrastructure development including paved roads and paved airports.

Source: CIA World Factbook, data as of 2017

KEY TAKEAWAYS

Insights for investors

Index providers have gradually increased China’s relative weighting in their investment benchmarks as the size of the country’s capital markets and available investments expand. As a result, many investment portfolios—even those that are simply maintaining a diversified allocation to emerging markets—will likely be affected.

 

Growth in China’s capital markets has meant changes in index structures

In 2018, equity index provider Morgan Stanley Capital International (MSCI) added more Chinese companies to its Emerging Markets Index, taking it from 100 to more than 400 names. The increases in the Information Technology and Consumer Discretionary sectors highlight some of the changes in China’s economy.

This chart shows the changing economy using the MSCI China Index, including increases in the Information Technology and Consumer Discretionary sectors.

Sources: Wells Fargo Investment Institute and Bloomberg, as of October 19, 2018

China’s debt market is now among the largest in the world

After a decade of double-digit growth, China’s supply of marketable debt is now approximately on par with that of Japan.

Sources: Wells Fargo Investment Institute and Bloomberg, as of October 19, 2018

What investors should do next

Global investors won’t be able to ignore China’s influence as it continues to grow and liberalize its capital markets in the years to come.
In our view, appropriate next steps fall into these two categories.

Icon representing diversification.

Those interested in gaining exposure to China’s markets should do so through a diversified allocation to emerging market assets. These markets are positioned to benefit from China’s broadening trade relationships. A diversified exposure should also blunt some of the risks of investing in China as a single market.

Icon representing China’s global impact.

Those averse to investing in China should still stay informed about developments in the country’s economy and capital markets. These developments are likely to increasingly impact the global economy—and investors’ portfolios.

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Wells Fargo Investment Institute is home to more than 100 investment professionals focused on investment strategy, asset allocation, portfolio management, manager reviews, and alternative investments. Its mission is to deliver timely, actionable advice that can help investors achieve their financial goals.

For additional investment insights and timely market commentary, visit our website. For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.

Follow us on Twitter at @WFInvesting

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China's Place in the World