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China's Growth Prospects 2021 & A Test on the Convergence Theory

Updated: Oct 1

Key Terms: China, 2021, Domestic Demand, Credit Reform, Productivity Factor

Key Sources: IMF, World Economic Forum, RBA, others


China's growth for the next 5 years would become convergence theory's greatest stress test in modern history."

Convergence theory points out that as nations transition from the beginning stages of industrialization to highly industrialized nations, the same societal patterns will emerge, eventually creating a global culture. This has been the case for most of Western Europe, Japan and the reputable four Asian Tigers (Singapore, Taiwan, Hong Kong & South Korea). At the beginning of the 21st century, China seemed to be next in line. Its pattern of growth was seen by many as a magnified resemblance of that experienced by South Korea and Japan in the late 1980s~early 1990s. As China joined the World Trade Organisation (2001), softened its entrance barriers for foreign entities and played a low-key role in international affairs, it appeared to be clear that convergence theory remained valid.


With some objective lens, we'd be surprised to find out that this theory relied upon by the majority of Western economists is merely 60 years old. We'd be forgiven to think that some degree of optimism might have taken root into the very foundation of this theory. Bringing in some context, the 1960s was a turbulent period in history, the cold war was at its height and China had just forcibly industrialised (Great Leap Forward). More importantly, as both Germany and Japan remained in the progress of rebuilding, the US was the dominant economic power in both terms of consumption and supply. Things gradually changed as Western Europe came out of its ruins closely followed by Japan's roaring 70s. The rise of these economies later became what was known as the first convergence; or else known as the convergence within the "American sphere of influence," it all seemed to make perfect sense.



"You are either with us or against us," wise words from the 43rd US president (G.W.Bush) demonstrating the American spirit as the world's only superpower. By the early 2000s, cracks within the convergence theory started to pop up. Industrialised nations across the Soviet Bloc seemed to have fallen in a newly prescribed mid-income trap, or else known as the omitted variables across the convergence mean diagram. Ironically, these nations' lack one common key-dependent factor: "the support of US consumers." Growth without the support of the world's greatest consumer spending power is simply impossible. The Middle East was a different story, they had something American consumers desperately needed (hint: it starts with "O"). China in the 2000s also had something American industry titans demanded, an abundance of human labour (greater profit margins). After 15 years of "mutual-cooperation," China became the world's second-largest economy while the US remained the head of international affairs, it all appeared to be bright until China's politburo turned hawkish and the US shifted towards anti-globalism.



Unlike the Soviet Bloc, China has a matured domestic consumption base and has a solid grip on its status as the globe's dominant exporter. Nevertheless, Chinese leaders understand well that the core pillar supporting their present prosperity remains to be the US consumer. Deliberately, to hedge the risks derived from this current reliance on US consumption the Chinese president unveiled his most ambitious projects to expand China's consumption base. Signature projects included the creation of the China-led Asia Infrastructure Investment Bank (AIIB) and the 21st Century Belt & Road Initiative. As China's total productivity continued to rise through 2015-2020, with sectors such as banking & technology levelling to that of the US, a convergence independent of American influence was on track on becoming a reality.



Everything changed as this export-focused hedge was severely hindered by the sudden outbreak of Covid-19. As the global criticism of China's handling of the initial outbreak continues to rise, China has shifted its focus towards a growth model dependent on domestic consumption (read more on this in Xi's Great Dual Circulation).


Key Things to Look out for


  • Will China be able to grow its total productivity factor?

  • Will China achieve convergence with its domestic consumption base?

  • Will China fall into the mid-income trap?

  • Are American consumer's still as influential as they were a decade ago?

  • Will China be able to reignite international interest in its export projects?



The key question know is whether China's domestic consumers are able to take on the burden as the nation's primary growth factor"

All these questions are taken into ACH's investment decision-making process. For more information or a more technical analysis of the total productivity factor model, please let us know by clicking here.


BULL CASE

  • China maintains an above 5% GDP growth until 2025 (Key Data: China GDP)

  • Chinese consumers begin to decrease their savings through additional consumption. (Key Data: China Household Savings Data)

  • Government Institutions are able to inject more credit into China's financial system and create enforceable legal protections against bankruptcies (Key Data: China Credit Flows)

BEAR CASE

  • China falls into the ‘low-mid’ income trap and enters into a phase of stagnation up until 2035. (Household Income)

  • Retail Growth remains passive as general inefficiencies embedded within SOEs are magnified. (Inflation | PPP | GNP/GDP)

  • Twin deficit: enlarged current account deficit, CNH suffers It greatest devaluation {depends on the fed’s future as well}, Capital account deficit as the nation’s financial assets’ capacity to generate value is lower than a global average. (Current Account | Capital Account)


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