The Very Long View on China.

I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some falling crumbs of wisdom. So, I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director, Dominic Barton, when he passed through San Francisco visiting clients.

These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed in the process.

Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession, much faster than the West, and if this didn’t work, they had another $500 billion package sitting on the shelf ready to go.

But with GDP of only $5.5 trillion today, don’t count on China bailing out our $16 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC’s, and to live in big cities.

Asia has a huge edge over the West with a very pro growth demographic pyramid for the next decade. China needs to spend a further $2 trillion in infrastructure spending to accommodate these needs. After that, the implications of its 33-year-old one child policy will come home to roost, with deflationary consequences.

Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra-Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as has already become so obvious with oil. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to Asian growth.

To me this all adds up to big core longs in China (FXI), one of the lagging emerging market ETF’s this year. With each passing day, it looks like the Middle Kingdom’s three year bear market is over.

A quick Egg McMuffin next door after the meeting filled my other needs.



China is Reclaiming its Position in the World Economy

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