5 Myths About China’s Economy & Financial System

…This article focuses on five myths about China’s economy and its financial system with my hope that offering more realistic assessments will help investors better judge the opportunities and risks of investing in China. Words: 854

This version of the original article by Stephen H. Dover of Franklin Templeton Investments has been edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

Myth #1: China Is an Export-Led Economy

…China’s economic transformation owes far more to the successful adoption of a market-based domestic economy and to its vast mobilization of savings for investment. [Here are the facts:]

• China’s export share is rather modest at 19% of gross domestic product (GDP) and that’s roughly the same proportion as Brazil or India, and only slightly higher than Japan.
• China’s export-to-GDP ratio is a full ten percentage points lower than countries such as Canada, France, Italy, South Africa, Turkey or the United Kingdom.
• China exports less as a share of GDP than Russia (25%) or than the average low-, middle- or high-income country worldwide. It is only in comparison to the United States, where exports account for just 10% of GDP, that China could be labeled as ”export-led.”
• China is the world’s largest exporter by value with over US$2.7 trillion in merchandise exports last year, edging out the United States.
• One in 10 goods and services exported globally comes from China but the sheer dollar value of China’s hefty exports merely underscores the basic point:
• China exports a lot because it is a large economy, yet its domestic economy nevertheless dwarfs its exports.

…Where China is truly a behemoth, though, is in domestic savings and domestic investment…[which] have been the key drivers of China’s five-decade long growth spurt…

Myth #2: China Is Rich

…While China has a burgeoning middle class, as well as many wealthy families, it is predominantly a middle-income country…China is often confused for a rich country because its overall economy is so large but income-per-head in China is only one quarter the level of the European Union (EU) and one fifth U.S. levels.

China’s annual GDP now rivals that of the United States or the EU but China’s population is 4.4 times larger than that of the United States. China’s wealth is also very concentrated in the big cities along its coast, while the western portion of China is much poorer and still needs development.

Myth #3: China Is Rebalancing

The third myth is that China is rebalancing its economy away from investment underpinned by high savings and manufacturing toward consumption and services but, in truth, China is working toward rebalancing but hasn’t yet made the necessary progress.

Myth #4: Foreign Companies Are Leaving China

The fourth myth is that foreign companies are exiting China in droves, driven away by trade wars, rising geopolitical tensions, and pandemic-induced disruptions to global supply chains. The reality is different…

• Indeed, as the global economy has recovered over the past year, demand for China’s manufactured goods has soared, and China’s exports jumped nearly 30% in 2021…
• China also remains a magnet for foreign direct investment (FDI), which reached its highest levels on record last year. In 2021, China recorded its best year of FDI inflows, up over 40% compared to pre-pandemic levels. Last year, China garnered one in five dollars of global direct investment.
• Foreign interest in China is also reflected in surveys. According to a Chamber of Commerce survey conducted in mid-2021, 60% of US and European firms planned to increase their China investments. Of 300 US firms polled, not one had relocated its operations from China back to the United States. Less than 10% of European firms planned to trim their operations in China, the lowest percentage on record.

Myth #5: China Restricts Inward Investment

The final myth is that China shuns foreign investment in its economy….but the reality is that the United States and Europe are making their capital markets less attractive for Chinese companies, but China is not adopting a similar strategy with respect to inbound investment.

• Selective liberalization of Chinese foreign ownership regulations has been a factor in retaining and attracting new FDI. In recent years, China has reduced the number of restricted sectors, industries and firms eligible for foreign investment and foreign ownership…
• In addition, the China Securities Regulatory Commission (CSRC) has recently introduced guiding principles on accelerating the development of the mutual fund industry.

Those moves send a strong signal beyond finance, conveying a message that China is both open to inward investment and is interested in providing competitive financial services to its domestic residents.

China Remains Misunderstood in the West

China’s economy is in transition as it grapples with the challenges of transitioning from growth based on unsustainable levels of investment (above all in property) to something else. Its focus may be on the long run, but it seemingly cannot endure much economic pain in the short run, a factor which stymies that transition and could make it less successful over time yet, China is also not turning its back on the world.

• In geopolitical terms, its ambitions may come into conflict with those of the West, as its recent support of Russia attests, but China remains committed economically, financially, and politically to global engagement, as its recent economic performance and policy initiatives also attest.

China will remain both an enigma—and a relevant economic power and investment destination, difficult to define by simple myths…