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China's rapid rise to being a global superpower hinged on mass industrialisation throughout the late 20th century - it has resulted in China having a global influence and some of the world's largest companies. However, it is unlikely to have had such great an effect without the lack of worker's rights and without severe environmental destruction. This history is one of the key reasons why we, as responsible and sustainable investors, continue to monitor developments in China.

China's economic development

EdenTree Investment Management EdenTree Investment Management Responsible Asset Manager
Edentree Insight reports

China on the world stage: What it means for responsible investors

EdenTree Investment Management


Responsible Asset Manager
24 Mar 2021

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Chapter 1

China's economic development

Until 1978, the Chinese economy was closed off from the world and was mostly agricultural in outlook. Plans under Mao to industrialise the countryside under the second five year plan also called the Great leap forward had failed, and the so-called leap forward which aimed to increase farming yields led to mass starvation instead. Only under reforms led by Deng Xiaoping, after he took power in 1978, did China open up to the western world and began to establish relations with the US in particular.

China Annual GDP growth (%) 1961-2019

China-GDP-growth-line

China saw GDP growth reportedly averaging almost 10% a year between 1978 and 20101, and whilst critics have raised reservations about the veracity of the reported figures, China has undoubtedly seen spectacular economic development.

Economic development also led to a reduction in poverty. GNI per capital significantly increased after 1990 and whilst in absolute numbers the population living in extreme poverty remains high, the population living under the international poverty line of USD 1.9 (in purchasing power parity) a day has been reduced to 1%. China’s development has not only brought economic gains; China has also seen progress on a number of social indicators. Reforms to health and education systems have led to big improvements in literacy rates and a reduction in the number of patients who have no access to care when needed2.

China is however a country of contrasts and economic growth has also been accompanied by an increase in economic inequality. China counts amongst the largest number of billionaires in the world and has also seen an increase in GINI coefficients (a metric measuring income inequality), even higher than Britain or the US3.

China’s remarkable progress in reducing extreme poverty has significantly contributed to the decline in global poverty - Hoon S. Soh, World Bank Program Leader for economic policies for China

China’s economic development is in large part linked to its manufacturing capabilities and ‘Made in China’ has become a global symbol of China’s rise and industrial dominance. An abundance of lower-wage workers and the creation of a vast ecosystem of suppliers and distributors turned China into the manufacturing centre of the world. In addition to technology, China’s leading manufacturing position also prevails in garments, automobile parts, electrical machinery, furniture and bags & accessories. Made in China is how the rest of the world sees China, however that is set to change. Under its Made in China 2025 strategy, the country wants to develop its manufacturing sector further, but moving away from cheap low-tech goods and expanding in high-value manufacturing and services. It will also encourage more domestic consumption and reduce reliance on foreign exports. China’s economic development is also visible when seen through the lens of the largest companies globally. Twenty years ago there were only 10 Chinese companies in the Fortune 500 list. By 2020, there were 124, and for the first time there were more Chinese companies on the list than US companies4. However a substantial part of the economy remains controlled by the State and only a minority of Chinese companies in the Fortune 500 list are privately owned.

In addition to its global role in manufacturing, China also represents an attractive consumer market. With approximately 1.4 billion people or just under 20% of the world’s consumers live in China. As China develops and people get richer, consumption is set to increase further, presenting huge opportunities for businesses seeking to take advantage of the growing Chinese market. Spending patterns are already changing: for instance, spending allocated to food has decreased from 68% in 1990 to 25% in 20175.

This Insight would not be complete without mentioning China’s relationships with its key economic counterparts: the US and the EU. China and Europe trade on average over €1 billion a day and both Europe and America have large trade deficits with China; we have already witnessed this deficit being one of the starting points of the ongoing US-China trade war in the last two years. Trade tariffs imposed by both parties have done more harm than good and relations continue to be tense at the time of writing.

US trade deficit with China has soared since 1985

US-China-trade-deficit

Supported by its economic development, China’s influence on the global stage has significantly changed in the last 20 years, however it is not just economic. It uses its soft power to build relationships by hosting large international events such as the 2008 Beijing Olympics and the 2010 World Expo in Shanghai and uses ‘Panda’ diplomacy - the practice of sending Pandas on long term loans to other countries – to build international relationships. China’s foreign investments have also seen rapid development, especially through the so called ‘Belt and Road’ Initiative: a spectacular plan along the “21st century silk road” covering 71 countries in Asia and Africa. Its rising military presence is also noteworthy, with China arguably succeeding Russia as the only other military superpower alongside the United States. China visibly demonstrates this potential with activity in the South China Sea and in areas of ‘influence’ such as in Hong Kong.

The rapid changes seen over recent decades makes it difficult to predict what China will look like by the mid-century when it celebrates the 100th anniversary of the founding of the People’s Republic of China; surely China’s development won’t stop here. As it continues to develop and further its influence, the topic of responsible investment in a world dominated by China becomes even more relevant.

Issues for responsible investors

China’s position as a world leader means what happens in China affects the rest of the world, this is especially true for environmental, social and governance standards. These issues are relevant when investing directly in China, in companies with operations or supply chains in China, and/or those seeking to access the growing Chinese consumer market.

Many of the social and governance issues are directly linked to companies operating there, whilst many of the environmental issues pose global challenges at a macro level. China’s position on the world stage means its environmental efforts can, for instance, make or break the Paris Agreement. Given investor focus on climate change, we believe China’s moves should be watched closely.

Sources

1. World Bank GDP data https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN

2. OECD and BMJ

3. The Economist & OECD

4. Fortune 500 https://fortune.com/2015/07/22/china-global-500-government-owned/

5. McKinsey Global Institute: China and the world Inside the dynamics of a changing relationship, 2019

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