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Jonathan Woetzel, Director in McKinsey’s Shanghai Office
A number of somewhat immoderate viewpoints on the subject of China are in vogue
nowadays: China is the center of the world; China's economy is going to take
over the world; China is the world's manufacturing workshop; China is the world's
largest economy.
What’s needed for context on a discussion about China, however, is a
reality check. China has a GDP roughly the size of Italy’s. China's GDP
by the year 2010 will be roughly the size of Germany’s. Between now and
2010 the Chinese economy will grow by roughly the size of Spain’s. China
grows by Spain every 5 or 6 years. China is not a small economy, but on the
other hand China is certainly not the size of the United States in economic
terms. Many of those who are interested say that China won’t pass the
U.S. until roughly 2040, which is within our lifetime, but perhaps not within
the span of our careers.
So, in thinking about making investments in China, it's important to get both
the timing and the context right. For industries that are present at a relatively
early stage of the country’s development, such as basic materials or cheap
consumer goods, China is particularly important for the broad range of opportunities
now available. But, if you're in a business that is at the more advanced end
of the spectrum, then you need to think carefully about what role China should
play in your portfolio.
In addition, there is the issue of sustainability. A popular view is that the
Chinese economy is getting out of control and can’t keep growing at the
rate it has been, and that external forces will shut it down. Again, the reality
is that China is a domestic story. Eighty percent of China's investment comes
from Chinese people driven by 40 percent savings rates and 40 percent investment
rates. Those are high numbers but they are not unprecedented. South Korea, for
example, had similar savings and investment rates for more than two decades.
As long as China is investing and getting some return on that investment, then
the Chinese economy is sustainable.
Supporting that sustainability is China’s strong productivity record.
If you look at the decade of the 1990s, labor productivity grew by more than
12 percent in China’s industrial sector, compared to say 4 or 5 percent
in the U.S. That reflects the incredible impact of taking a rural society and
turning it into an urban and industrializing one. Essentially, China is running
with the same playbook that Korea and Taiwan used, but it’s a lot bigger
and a lot more domestically oriented.
As a final point, there's often the temptation to look at China as a communist
country and a state-run economy. It's not. About two-thirds of the economy is
non-state run, and, even more importantly, the funding of the Chinese economy
is increasingly driven by capital markets. More than 40 percent of the capital
invested in China this year is being raised by equity and bond issuances. Any
Chinese executive you talk to these days is no longer thinking about where is
he going to get his next bank loan from; he's thinking about how he can IPO,
and what he is going to get for his secondary issuance.
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