China Icebergs: Forces that could reshape the world
In the 1820s the world’s economic powerhouse was China,^ at almost 20 times the size of US GDP. China’s decline began in the 19th century and lasted until the country’s economic reforms that began in 1979. Since then, China has rapidly re-emerged as a major economy and could reclaim the top spot by 2032, The Economist Intelligence Unit (EIU) forecasts.*
TIP OF THE ICEBERG
On the surface, China’s remarkable progress from near-zero share of the global GDP pie in 1980 to being the world’s second-largest economy today is manifested in the futuristic cities like Shanghai, where residents transact without cash over mobile phones and sometimes pay using facial biometrics instead.
On a global scale, a profound shift in the business order has already occurred. Greater China, including Taiwan, now claims more of the world’s largest corporations by revenue than any other market, according to the 2019 Fortune Global 500 list. Moreover, China’s private sector now accounts for two-thirds of its GDP and 80% of urban employment,# and is key to the shift from a state-backed to a consumption-led economy.
These trends may be visible on the surface, but, there are hidden factors, or icebergs, on the horizon that can change China and the world, and investors should be watching out for them.
Based on data and history, the report identifies three icebergs that should be on investors’ radars:
Consumption at scale. By 2030, the EIU projects that 480 million Chinese consumers — more than the entire US population — should reach upper-middle and high-income status.+ That implies logical trends, such as more meat on dinner tables that have a knock-on effect in agriculture, retail and food delivery. How does China’s consumption at scale alter the dynamics of consumption itself?
Compounding technological advances: How much and how quickly technological progress will build is the large, less visible part of the iceberg—innovation at scale may be as disruptive to world markets as consumption dynamics. Today, China lags the US in terms of semiconductor production and sophistication, but what does it mean for global businesses if this sector also becomes China’s domain? Discounting the possibility of China becoming a formidable technology center in the 21st century is an iceberg-size risk.
New growth centres: While the top-tier cities still represent only about a tenth of China’s total population, the lower tier moving up in consumption power and consumer confidence is analogous to another China, with its scale and technological capability, coming into the global economy. If top-tier city consumption has been driving the growth seen thus far, what happens as the remaining billion or so people catch up?
Local Knowledge Matters
Outside China, these icebergs may be challenging to see. China’s economy is not without risks or challenges; often side effects of its compressed development timelines can be pitfalls for entrepreneurs, investors or established corporations. Local insights and investment expertise can help investors uncover these emerging opportunities. Gain more insights on how to navigate China, download the PineBridge/EIU China Icebergs report.
^ Development Centre of the Organisation for Economic Co-Operation and Development; Chinese economic performance in the long run, second edition
* The Economist Intelligence Unit, Country Forecast Main, China, April 2019
# The Economist, 8 December 2018; https://www.economist.com/business/2018/12/08/chinas-private-sector-faces-an-advance-by-the-state
+ The Chinese consumer in 2030, The Economist Intelligence Unit Limited 2016 . EIU definition of consumer segments: Low income - less than RMB13,000/year; Lower-middle income - RMB13,000-67,000/year; upper-middle income - RMB67,000-200,000/year; high income - over RMB 200,000/year
1 UN World Urbanization Prospects 2018
2 Source: Economist Intelligence Unit 2018 estimates
3 US Census Bureau, as of 1 July 2018
4 Economist Intelligence Unit estimates
5 Economist Intelligence Unit forecast as of 9 August 2019
6 Boston Consulting Group x Tencent China Luxury Digital Playbook June 2019
7 McKinsey "How the global supply landscape for meat protein will evolve," October 2018
8 McKinsey, “The market for China autonomous vehicles,” January 2019
9 IDC, as quoted in IDC, as quoted in China Daily 20 December 2018
10 2018 Hurun Greater China Unicorn Index
11 Ernst & Young, “China is poised to win the 5G race,” 2018
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Last updated 22 July 2019