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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
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
Presenter: Peter Donisanu, Investment Strategy Analyst, Wells Fargo Investment Institute
China’s development over the past 20 years has been remarkable. In a relatively narrow span of time, nearly ¼ of China’s population left their rural homes to take advantage of growing economic opportunities in the cities. During this same period, the share of the population living in extreme poverty fell from 40% to less than 1%.
We believe this is a result of Beijing’s long-term plan to create an increasingly affluent population, supported by a services and consumption-oriented economy.
Yet, this explosion in growth has led to concerns over China’s increasing global prominence—and has fueled recent trade disputes.
By many measures, China is still a developing economy, and has a ways to go to achieve its goal of a level of prosperity that is comparable with that of more advanced economies.
In fact—assuming that the current pace of economic growth in China evens out—we estimate that the size of the Chinese economy could match that of the U.S. by 2036, but because China’s population is expected to remain nearly four times the size of the U.S. population for the foreseeable future, China’s per capita wealth could continue to lag the U.S.
Even so, as China’s economy and global influence advance over the next few years, we anticipate long-term growth opportunities as Beijing begins easing restrictions and encouraging greater use of its equity and debt markets by foreign investors.
In our view, investors who wish to benefit from China’s economic expansion should carefully consider a diversified allocation to emerging market assets.
To learn more about how these dramatic changes in China’s economy could affect global investors, download our Wells Fargo Investment Institute special report: China’s Place in the World.
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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.
Innovate & Localize
Increase homegrown technology
Use onshore global supply chains
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.
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.
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.
Source: CIA World Factbook, data as of 2017
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.
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.
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.
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.
Download “China’s Place in the World”
The full report includes more insights to help investors succeed in 2019.
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