Here is what I think. As a Chinese, I wish all the best of China's future. However, I have to say that at this time I could not see a bright future of China in the next 10 years. Here are my reasons:
First, although the government tries very hard to shift the growth cylinder to the consumption, such a change is yet to take place. The current China GDP downturn is partially caused by RE restrictions, tighten monetary policies, and a wage increase pushed by the government. At the end, when the economy growth dipped to a level not acceptable by the government, the tools used to fix the problem are simply the old tools that the government tried to avoid. The government has to weigh the short-term.
Second, the relative competitiveness of Chinese companies is declining quickly. While the higher wage fail to stimulate too much more consumption, it does push costs higher for Chinese companies. Ideally, Chinese companies should push higher efficiency via product and process innovations to offset the higher labor costs. However, real innovations are still a pure dream for many Chinese companies. Lack of critical thinking education, political uncertainty, and short-term profit culture all play a role on the lack of innovations in China. Such a problem is not going to change in the next five-year period.
Third, China has already reached a middle income level. What happened in China in the last 30 years has pushed China from a extreme low income country to a middle income country. The problem is whether China has the ability to become a high income country. In the past, many countries climb to a middle income status relatively quickly while they fail to grow to a high income status after more than 30 years. The ceiling is apparently closer and closer for China. Without a successful reform, I could not see China pass that ceiling.
I understand many posters here are pure bottom-up investors, who may pay little attention to the economy and industry conditions, but I look forward to hearing opinions from everybody about China's long-term future.
Great thread. I learned a lot just reading it.
@GV, on your second point, I can see how increasing wages are weighing on China's competitiveness, but do you see other factors harming China's competitiveness, as well?
Maybe it's just being raised in the US, but I was always taught that when a people move from a command economy to free markets, the entrepreneurial spirit unleashed by the citizens' new found freedoms creates economic efficiencies greater than any upward pressure on wages, meaning that both wages and competiveness could increase at the same time.
@Hmmm, you are right about the entrepreneurial spirit. I can even assure you that the average entrepreneurial spirit among Chinese people are actually higher than American people. For many Chinese, there is little to lose to make money as an entrepreneur. However, many these new entrepreneurs are only aimed at making quick profits rather than building a long-term business. Everyday, you will find new people who can afford Hermès Birkin bags, but many of these new rich folks do not even make money by a real legal way. I am not saying there are no real entrepreneurs in China, but it is the uncertain political and legal environment and the culture of a fast profit make many people more inclined to make money in a quick way.
What I feel will increase China's competitiveness is a highly innovative business environment. However, free market alone is not sufficient to support such a highly innovative environment. A more advanced legal system is required as well, so are many other factors.
I think China's prospect are rosy from one point of view and dismal from another. For a country exiting a nominally thousands-year-old feudal society only 35 years ago, the prospects are outstanding. From the point of view of China developing a modern economy on par with countries from the former Soviet Union, the prospects are bleak. It is impossible to envision a modern economy in China. The obstacles are just too great. The whole culture would have to be restructured. That is not gong to happen.
Should China even be judged on a historical basis? China in the last 30 years has experience what America experienced in the early part of the last century. Increasing food production productivity freeing labor to pursue other activities. As the same trend in the United States, the excess labor moved to cities because city life is sweat, What China will not experience is the economic benefit of being the least impacted country after two World Wars and the expansion of the manufacturing base. Yes, I said that correctly, China has actually lost manufacturing jobs like the rest of the world in the last 25 years because of increase productivity. Can a country without a well-developed middle class flourish in the post-industrial age?
@Casey, interesting stuff. I use the China to US analogy, too, but I usually go with the US, circa 1870. Having just emerged from a period that wasn't conducive to economic growth (Civil War / Communism), a country with nearly limitless economic potential enters the global marketplace.
Between 1870 and 1900, the US went from the 6th to the 1st largest economy in the world. China's post (economic) communism boom is moving only slightly more slowly.
@Casey, wonderful comment from such a unique perspective! As you said, it is big uncertainty as far as where China is heading to. Middle income trap is something I really worry about. It did not take Japan and Korea more than 30 years to become high income countries. However, they are much smaller than China. With 1.3 billion people, if China becomes a high income country, it's status will be unparalleled in the world.