An investment in China despite the recent economic slowdown still makes sense. The best way would be to invest in a company that is already on the ground and has local partners and affiliates. Let them worry about local officials and laws as well as government regulations and corruption.
China in geographic terms is a continental giant at 9,596,961 km (3,705,406 sq miles) making it the 3rd largest nation in the world. It stretches some 5,026 km (3,123 miles) across the East Asian landmass.
China has a population of about 1,332,460,000 inhabitants. It has the largest population in the world.
Despite the economic slowdown in Gross Domestic Product (GDP) China still grew 7.70 % in the 4th quarter of 2013. It remained 7.5% or above for the entire year. The GDP for 2013 is reported to be 9.4 trillion. This compares with the United States at 17.1 trillion.
The real contrast between the United States and China is the GDP per capita. Where the United States is around 50,000 dollars per capita in China that figure is between 6 and 7 thousand dollars. It is the rapid economic growth that makes China a place to invest even after decades of rapid development.
From 1989 to 2013, the average annual GDP growth averaged 9.2%. It was at an all time high at the end of 1992 coming in at 14.2%. The lowest growth rate ever recorded during this period was 3.8% in December of 1990.
Shanghai Skyline
The forecast for economic growth in 2014 is 8% or higher. It is below the higher rates that China and the world has been accustomed to but still a good rate even if it remains in the 7 percentile area. A comparison with the United States again is economic growth of between 2% to 3% annually at best, forecast for the next decade.
Industrial production increased by 9.7% in 2013. Growth in the mining industry increased by 6.4% in 2013 (China has become the world’s largest gold producer). Manufacturing increased by 10.5% for the same period. 2013 also saw the production and supply of electricity, gas and water increase by 6.8%.
The total value of imports and exports in the year 2013 was 4,160.3 trillion dollars. This was an increase from 2012 of 7.6 %. The total value of exports was 2.210 trillion up 7.9% for the year. The total value of imports was 1.950.3 trillion dollars a yearly increase of 7.3%.
Investment in fixed assets grew 19.2%. The investment in the state owned and state holding enterprises rose 16.3% in 2013. More importantly private investment went up 23.1%. The private investment accounted for 63% of the total investment. The investment in primary industry alone increased by 32.5%.
The total retail value of all consumer goods increased 11.5% in real value.
China contains a huge domestic market that many companies domestically and internationally would like to be able to sell to. It has finally become what the West hoped for in the last 200 years. That is a place to sell a huge amount of goods and services.
China has a rising middle class that finally has money to spend. They also have a newly rich class that will be in the market for many of the luxuries that Europe and the United States have for sale.
It also has up to this point, a stable government that has been able to maintain legitimacy through its promise and delivery of continued economic growth.
If you have the right product that meets the needs and customs of the Chinese people you will have a enormous market to cater to (See Well Power). Chinese consumers are hungry for goods that will simplify and glamorize their lives.
In 2013 another milestone was reached when China which had previously passed Germany now surpassed the United States as the world’s largest trading nation. This occurred as China passed the 4 trillion mark in total world trade.
China had already become the world’s largest exporter in 2009.
The trade surplus for China rose 12.8% in 2013 to almost 260 billion dollars.
There has been some anxiety that some of the government statistics are not as accurate as they should be as a result of that some companies that have overstated their export sales so they are able to bring in more hard currency. This would be in an attempt to circumvent central Chinese government controls on cross border cash transactions.
Stock Exchange in Shanghai
The Chinese government has been clamping down on this activity more aggressively in 2013 with export papers being scrutinized more closely as announced by the Chinese foreign exchange regulator earlier in the year. If successful this will lead to more accurate reporting but overall the Chinese gains have still been impressive.
There are some challenges that China will face in the near term and more in the long term.
China’s one child policy has in the past generation created an unusual population situation as the population begins to age. It has already skewed the sex ratio as male children are more popular with Chinese couples than female children. This is the result of a combination of culture and economics.
This will create a labor shortage overall and will make it difficult for all companies both domestic and international to find, train and retain skilled workers. As the population ages this problem will become more acute.
Provincial governmental debt has reached very dangerous and sometimes unmanageable levels. The liabilities at the local level as reported by the Chinese central government was rapidly approaching 2 trillion dollars. It is much higher if all the actual debt is added in with figures approaching 4 trillion. This debt has now easily reached a third of the GDP of China.
Another concern for the Chinese is the continued appreciation of the yuan. In the last 10 years the Chinese currency has increased in value by 35% if not higher in reality. This rise in the worth of the yuan makes Chinese goods more expensive abroad. This will naturally lead in a decline in Chinese exports.
The price of labor in China is also rising faster in China than its principal trading partners.
There is an increasing competition from local firms in relation to multinationals.
At 122 billion in 2013, China’s services deficit is by far the biggest in the world. A big gap in spending is tourism. China’s deficit in travel spending alone reached 80 billion in 2013 as more and more Chinese travel outside the country.
If the current trends continue the GDP of China will pass that of the United States by 2020.
At the same time things are getting more difficult for multinationals in China. The bureaucracy in China is growing in size and scope. The legal and regulatory challenges continue to increase. 4 out of 5 American companies in China have reported that these two situations hinder business.
There is consensus that the so called unclear regulatory environment is a major problem as well.
However, 3 out of 5 multinational companies plan to increase their investments in China for the year 2014.
The official policy of China knowing the limit to continuous growth in exports, is looking for more investments in the domestic market. This will lead to increased domestic consumption. This will provide new opportunities for foreign investors in China.
However, despite the difficulties of doing business in China in comparison to most other areas of the world there is more economic growth in China by far. Advanced economies have remained stagnant, and many emerging economies will experience slower growth now that the American Federal Reserve is winding down it’s easy monetary policies.
China on the other hand, has maintained currency controls, huge foreign reserves, rapidly expanding gold reserves and a growing economy still somewhat isolated from the world market. As a result investor interest in China will continue for the foreseeable future.