Instructive Charts Explaining China’s Long-Term Trends
The power of China’s economy is something that every investor is going to have to deal with, regardless of whether one is interested in investing in China or not. In the following post, I’ve compiled some of important charts demonstrating the growth China has experienced in recent decades, as well as how the economy is changing.
In particular, I look at whether the factors often cited for China’s growth are likely to continue fueling the economy’s rapid expansion, or whether new drivers will need to emerge.
The first chart that we’ll examine is one depicting historical Gross National Product:
China’s GNP growth is daunting. But the above chart doesn’t necessarily tell us how fast China’s economy is expanding on a yearly basis. So our next chart of year-over-year GDP growth rates might help put China’s growth into perspective a bit better:
Investing in an economy that’s growing at a minimum of 6% per year is like shooting fish in a barrel. One of the primary sources of China’s strength isn’t great ingenuity, but rather a tremendous population. This chart shows how China’s population has been growing:
Unlike our chart on China’s gross national product, this chart is surprisingly not growing at an exponential rate. It isn’t compounding the way our first chart did. This is likely the result of both China’s one child policy as well as cultural and demographic changes encouraging less population growth. As a result, mere population growth will not be enough to sustain China’s economic growth rates.
With GDP/GNP rising and population growth slowing, we can guess that per capita metrics are also improving. A big part of this is the well documented migration of rural agricultural workers into the cities. Is this migration continuing at an exponential rate or is migration slowing? The chart below shows urban employment in China:
This chart shows us that the flow of migrants to the city has been somewhat constant over time, meaning the migration rate is slowing.
If GDP/GNP is growing exponentially, city populations are growing linearly, and the population is growing at a slower and slower rate, then wages must be increasing. The following chart shows us how wages have changed over the last decade:
The upward trend is obvious, and the sawtooth pattern is caused by seasonal changes in demand for labor as a result of Chinese holiday seasons. Social rights issues aside, it can be gathered from the chart above that quality of life is improving in China. It’s hard to believe that the Chinese people could be making 2-3 times more than they were making just a decade ago and not be enjoying some of the fruits of their labor. Unfortunately, Chinese residents aren’t fully capturing the higher standard of living that the increase in wages and GDP growth would imply. That’s because of China’s monetary policy, which is causing headline news weekly. The chart below shows how inflation has affected China:
Government policy to keep the Renminbi cheap relative to the US dollar and other global currencies has resulted in significant inflation which has historically come in waves. It doubled from 1978 to 1989, then again from 1991 to 1996. It looks like another wave is about to begin. The good news for China is that this keeps unemployment low as Chinese labor remains cheap and “competitive”. The bad news for China is that this reduces the value of China’s savings. All those decades of hard work slowly evaporate as inflation chips away at purchasing power.
It is easy for an investor to get stuck looking at daily forex fluctuations, or the latest headline GDP growth rates. But occasionally looking at these important charts over the course of decades puts things into perspective.