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Finance & Economy

Understanding the two Chinas

Modern China

Modern China

Our view that China may be heading for a mild cyclical upswing next year needs to be set against the background of the broader economy, which is changing rapidly. We think that it makes sense to view the economy as consisting of two parts: old and new.

In its latest Five-Year Plan—full details of which will be announced in March 2016—the Communist Party of China set its goal for annual economic growth at 6.5%, well below the double-digit pace the country achieved at various times during the past three decades.

This was more bad news for western companies with significant exposure to China’s heavy industry sector, which has been particularly badly affected by the broad economic downturn. The trend has created real problems for such companies’ shareholders and employees, and this has naturally given rise to negative headlines in the western media.

In our view, however, the headlines tend to overlook or underrate the key fact that the composition of China’s GDP growth has changed. While the contribution from investment—traditionally the main growth driver—has declined as a share of GDP, consumption and services have powered ahead. They now account for more than half of GDP and considerably more than half of the growth.

This is fully consistent with China’s goal of rebalancing its economy in order to avoid the middle-income trap, and counts as a major policy achievement. It’s good news for investors, because it points to more sustainable, if lower, GDP growth over the long term.

Much of this good news isn’t getting through, however, partly because of the western media’s understandable bias towards reporting from the perspective of western companies, which have been caught on the wrong side of China’s economic policy shift.

For investors who want a more balanced and realistic picture of the risks and opportunities in China today, we think that it helps to think in terms of two Chinas—the old and the new.

New China Thrives as Old China Wilts

China's Economy

China’s Economy

A good symbol of the “old” China is what’s widely known as the Li Keqiang Index, named after China’s premier. This was popularised by The Economist magazine in 2010 after it became known that Li, when he was the Party’s senior official in Liaoning province, had focused on three indicators which he considered to be more reliable than local GDP figures. These were railway cargo volume, electricity consumption and loans disbursed by banks.

The Economist recreated the index to apply to China nationally. The magazine’s intentions were partly tongue-in-cheek, but the index came to be used quite widely as a second reading on China’s GDP figures.

This made sense up to a point, as the indicators were a fair reflection of an economy then dominated by heavy industry and state-run banks.

Today, the value of the index lies more in illustrating the difference between the old China and the new one. As theDisplay shows, the Li Keqiang Index—which tends to be volatile, given its narrow base— is significantly underperforming GDP. Meanwhile the “new economy” sectors favoured by government policy, such as consumption and services, remain relatively resilient, as reflected in the overall GDP trend.

Not Just Doom and Gloom

For active investors, this is a good indication as to where opportunities lie. Indeed, the strength of the consumer sector can be seen in recent data showing strong quarterly year-on-year growth in segments such as 4G mobile contracts (up 115%), holiday travel (84%), movie box office receipts (55%) and gross merchandise value for online retailer Alibaba (34%).

While it would be wrong to paint China’s prospects in the rosiest colors, we think it’s just as wrong to see the country as nothing but doom and gloom. What’s necessary, in our view, is a balanced and holistic perspective: an understanding of China as a country in economic transition and which, for the foreseeable future, consists of two economies, old and new.

Contributed by “Sky in Company” – English/Chinese and Italian/Chinese translation service

Source: Alliance Bernstein Blog -Understanding the Two Chinas


About Sky In Company

I am Genevieve Cheung, originally from Hong Kong. After completing secondary studies, I moved to Australia where I completed a degree in Bachelor of Business Management at the VUT in Melbourne. After graduation I moved to Italy where I have been living for more than twenty years. My vast cultural background and extensive linguistic knowledge (speak and write fluent English, Mandarin/Cantonese Chinese and Italian), allow me to join our company- SKY IN COMPANY (HK/ITALY). We provide main services such as web-site translations from Italian/ English to Chinese/English, and SEO services for the Chinese search engine "Baidu". Our offices, based in Hong Kong and Italy, have a young and dynamic team with collaborators around the world. Sono Genevieve Cheung, originaria di Hong Kong; dopo aver completato gli studi secondari, mi sono trasferita in Australia, dove ho conseguito una Laurea in Bachelor of Business Management presso la VUT di Melbourne. Dopo la Laurea mi sono trasferita in Italia, dove vivo ormai da più di venti anni. Il mio background culturale e la vasta conoscenza linguistica (parlo e scrivo correntemente l’inglese, il cinese mandarino e l’italiano), mi consentono di partecipare in quest’attività di traduzione in Italiano/English/Cinese. La principale attività della nostra ditta – SKY IN COMPANY (HK), consiste nella traduzione in lingua cinese di siti web italiani, nonché di servizi di tipo SEO rivolti al motore di ricerca cinese “Baidu”. La nostra ditta principale, con base in Hong Kong, dispone di un team giovane e dinamico con collaboratori in tutto il mondo. WWW.SKYINCOMPANY.COM skyinhk74@yahoo.com.hk HONG KONG OFFICE: Flat b 15/F, Block 7 Yee Mei Court, South Horizon, Ap Lei Chau, Hong Kong Island Hong Kong Tel: ++852 92235260 ITALY OFFICE: Via Metastasio 27 Firenze 50124 Italy Tel: ++39-347 1429011


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