#155 China and the World

Summary:

China has made progress in integrating with the world economy, achieving true global scale as a trading nation, but not in other areas such as finance. Now the relationship between China and the rest of the world is changing. A great deal of value could be at stake depending on whether there
is more or less engagement. Businesses will need to adjust their approach to navigate the uncertainties ahead.

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There are major gaps in China's 2018 progress:

The gaps are in: Services; Overseas revenues; Capital; Migration; Technology; Data; Environment and Culture.

 On balance China has been reducing its exposure to the world:

Great gains could accrue from China's bridging the existing gaps in its economy.

The potential contributions to the 2040 global GDP could be in $22 to $37 trillion range.

The imbalances in the China economy become apparent with an examination of the adequacy of  the supply for the economy. Though the supply of solar panels, rail, digital payments, wind turbines and electric vehicles appears to be adequate, the availability of semiconductors and aircraft  is inadequate. The scarcity requires the acquisition of lead-edge technologies and consumes large amount of capital that has only very long term payoffs.

China has been the world’s largest source of carbon emissions since 2006, and today accounts for 28 percent of the annual global total. To put this in context, China’s emissions in 2017 were larger than the combined emissions of the next three sources, the United States, India, and Russia. Although China has reduced its carbon intensity (the amount of carbon emitted per unit of GDP), it still surpasses that of many countries, including the United States:

The most important measure of China progress is the projected distribution of incomes:

The critical direction of China planning is to elevate the median families to the levels of mass affluent incomes.

In terms of spending, the major difference with USA is the Chinese decrease in housing expenses:

There are noteworthy increases in China spending on transportation, communications, recreations, education and apparel.

Digital technologies are another opportunity for China to boost exports. As e-commerce

increases access to the Chinese consumer, multinational corporations (small

companies or even individuals going global) from both emerging and advanced economies

can participate in China’s trade.

International businesses more choice and allocate capital more efficiently China’s financial system is far from globalized:

         

Further globalizing and modernizing the financial system would give Chinese consumers and businesses more choice and allocate capital more efficiently China’s financial system is far from globalized. This lack of global connectedness contributes to a lack of investment options for consumers and businesses. The portfolio of the average household in China is more highly concentrated in real estate than elsewhere. 

If China becomes less engaged with the world, however, the shortcomings of, and risks to,

the financial system would continue, and perhaps worsen. One area in which to improve

today’s system is the inefficient allocation of capital. SOEs account for about 70 percent

of corporate debt, but they generate only slightly more than 20 percent of industrial output,

according to an IMF study. 

With SOEs earning only 4% they are less efficient than private firms that average 9%. That shows that China capital is now as yet deployed effectively.

China has been the world’s largest source of carbon emissions since 2006, and today

accounts for 28 percent of the annual global total. To put this in context, China’s emissions in

2017 were larger than the combined emissions of the next three sources, the United States,

India, and Russia. Although China has reduced its carbon intensity (the amount of carbon

emitted per unit of GDP), it still surpasses that of many countries, including the United States.

China's investments in R&D still lag US spending with the US receiving large imports of fees for its intellectual property. There is a large disparity between the balance of trade between both countries with a prospect that it may take at lest 30 years to correct for the overwhelming dominance of the US.

We note that China has gradually been improving the regulatory environment for inward investment. Since 2013, China has used a “negative list” approach to regulating foreign investment—apart from instances specified on that list, foreign capital can enter the Chinese market after the investor registers. The number of specified restrictions fell from 139 in 2014 to 48 in the 2018 revisionWe note that China has gradually been improving the regulatory environment for inward
investment. Since 2013, China has used a “negative list” approach to regulating foreign
investment—apart from instances specified on that list, foreign capital can enter the Chinese
market after the investor registers. The number of specified restrictions fell from 139 in 2014
to 48 in the 2018 revision. Furthermore, the negative list details plans to open up
certain sectors in some respects. For instance, joint venture requirements in the financial
services sector will be removed by 2021. Moreover, China has launched 12 free trade zones in
the past five years, and there have been calls to make these zones less restrictive to foreign
investors. Furthermore, the negative list details plans to open up certain sectors in some respects. For instance, joint venture requirements in the financial services sector will be removed by 2021. Moreover, China has launched 12 free trade zones in the past five years, and there have been calls to make these zones less restrictive to foreign investors.

Nevertheless, China growth in consumption will be comparable to that of US plus Europe:

This can be best seen from an examination of consumption patterns.

Summary:

There are still major dis-allocations in the Chinese economies in 2018. It may take another 20-30 years before China becomes fully competitive on the global scene.