By Carlisle Jno Baptiste
For a country with a population estimated to be around 1.416 billion people, it must be recognized that China’s geopolitical challenges are not on a track that terminates in our kind of politics or economics. This means there, that, for governments in Africa, Central Asia, Latin America, and the Middle East, China’s rise gives them an alternative to either assimilation to the West or autarkic isolation.
China’s economy
China’s economy defies analogy, because for the past four decades, growth has been “unprecedented in human history”.
Now it must reconcile competing goals like accessing global markets while preventing creative destruction in its unique system.
It is clear that President Xi Jinping’s ‘common prosperity’ will therefore be delivered in a uniquely Chinese way, harnessing the benefits of free market capitalism while seeking to mitigate its excesses and inequalities.
Recently, we’ve seen the government’s willingness to trade high growth for sustainable growth. Increased regulation has swung the pendulum back to greater state control. When applied to the private sector, this discourages businesses in certain sectors from getting too big, too profitable, or too market-dominant, all in the cause of avoiding “inequality and instability.”
This has been unhelpful in assessing the long-term potential for a number of businesses.
A list of China’s achievements could go on. And yet its rapid growth in global economic and political importance hasn’t been matched by a similar shift in importance to investors.
After the fastest and most widespread economic transformation in global history, an inevitable change of gear is underway. China has grown its GDP by an average of more than 9 per cent a year since 1978. It shouldn’t be a surprise that this has had to slow down. Its investment-led growth model is being increasingly challenged by the economic, social, and environmental imbalances that accompanied its rise.
The previous solution to economic problems was to increase investment spending. But excessive investment spending is now the problem.
China’s leaders are busy looking to find new drivers of growth while addressing the negative legacies of the old ones. They need to boost domestic consumption – arguably the regime’s biggest challenge yet.
Some of these strains arise from China’s new growth-related self-confidence. Expectations that development would bring democracy may have passed, but flawed analogies between China and other countries persist.
It is very clear that the government’s intervention is also about supporting sectors critical to “future growth, prosperity and stability” and, despite the recent tilt towards the state, a slowing economy will only remind the government of the importance of an innovative private sector to their policy goals.
Hence, the rebalancing of policy in support of private companies bodes well for businesses previously caught in the regulators’ crosshairs.
Chinese school kids understand “made in China” through the lens of how their country’s invention of the compass, paper, and gunpowder transformed navigation, communication, and warfare.
More recently, many Chinese believe that achievements in poverty reduction, massive infrastructure investment, and now emergence as a tech innovator – have come about because of, “not despite, a strong government, with national rejuvenation driving a “more assertive China on the world stage.”
The private sector in China makes up 60 per cent of GDP, 70 per cent of tech innovation, and 80 per cent of urban employment.
So, while regulatory uncertainty has provided an uncomfortable backdrop, and the backlash of recent years will take time for business and consumer confidence to recover from, the balance between “innovation and regulation” is rapidly returning; recent years may have marked a tough cyclical downswing, not “a structural shift.”
China-Dominica relations
China is exceptionally well-positioned to engage small states like Dominica.
Dominica and China established diplomatic relations back in 2004, and since then, China has brought instant success with the building of the Windsor Park Sports Stadium and the Chinese three-pillar projects.
Since then, the relationship has evolved steadily across multiple sectors, including development cooperation, disaster relief, health, infrastructure projects, and agricultural modernization.
China’s economic investment in Dominica is significant. Chinese investments in the country total close to $625 million. For a country with a GDP of 688 million USD, that level of investment cannot be ignored.
Most of those investments – actually 80% of them – go to the construction industry (almost $495 million), with education ($110 million), trade and commerce ($12 million), technology ($4 million), and health ($4 million) receiving the remaining amount.
Infrastructure, clearly, is the cornerstone of China’s engagement.
The BRI, the GDI, the GSI, and the GCI have all played an essential role in this regard. For resource-constrained countries like Dominica, which often must rely on multilateral diplomacy and informal mechanisms to achieve its goals, China’s model offers both means and opportunity to offset structural disadvantages. Through a blend of development, security, and cultural engagement, China’s approach to small state diplomacy has found success in Dominica.
The State and the Market
The state and the market are both vital to China’s long-term development. But because of the country’s unique system, the two will sometimes get out of balance. We can expect continued pragmatism and a willingness to roll back policies that don’t help China’s long-term goals.
And, as opportunities flourish where top-down policymaking aligns with bottom-up innovation in a market as vast as China’s, whether in digitization, automation, climate solutions, or elsewhere, China is producing an increasing number of world-leading companies.
To meet the Government’s target of “moderately prosperous GDP per capita by 2035,” its economy is expected to grow by up to 4.5 per cent a year.
For all the challenges and frustrations of recent years, well-executed government policy has created areas of excitement. Renewable energy is one. With China a net importer of oil and gas, national security concerns incentivize heavy investment in renewables. Decarbonization is China’s strategic opportunity to deliver comprehensive industrial and technological leadership.
It must be noted that the number two economy in the world, China, has contributed more to global growth in the last decade than the entire G7 combined.
China’s stock markets are the second largest in the world. There are over 6,000 listed companies with almost 3,000 new companies emerging on China’s A-share indices in the last decade. China now has more 5G base stations than the rest of the world put together and more than 60 per cent of the world’s total 5G users.
Despite its carbon intensity, China has more renewable energy capacity than the next seven countries put together, leads global electric vehicle (EV), solar, and wind supply chains, and is pioneering efficient energy use through rapidly expanding ‘smart city’ digital infrastructure.
For a smooth transition, serious structural and institutional reforms are needed. But these bring political challenges. The recent picture is blurred by the effects of the Covid pandemic, but China’s economy is slowing on the back of declining labour force growth, diminishing returns to investment, and slowing productivity increases.
Now the great export powerhouse is increasingly looking inwards, and the dynamics of its domestic economy are critical to its next stage of development. This is an important shift, but a growing focus on national security via self-reliance will feed the narrative of a more adversarial relationship with its main global competitor.
But it also provides a tailwind of government support for cutting-edge industries, such as semiconductors, artificial intelligence (AI), and green technology: sectors that are critical to global challenges in the coming decades.
Focusing on China’s risks could lead investors to miss out on plentiful growth opportunities in key industries, but bearing that in mind, the Chinese government is swinging back to supporting the private sector to achieve the growth the country needs.
Meanwhile, although geopolitical tensions are inevitable, the country’s world-beating growth companies are pioneering the disruptive trends of the future investment strategies that have the potential for profit and loss, and while questions persist about the role of the Chinese state, the progress of its economic reforms and its perceived challenge to the geopolitical order have added to the fear factor.
But it must be noted that change and disruption bring “opportunities as well as risks.” The former can easily be overlooked by those making broad-brush statements in a short-term market.
There, the picture can be muddied by a host of factors more to do with politics, perspective, and sentiment than economic fundamentals.
Let us now look at it this way…China has proved itself far more innovative than many believed was possible, so don’t get distracted. The size of its markets and the scale of its ambitions provide formidable advantages, and the combination of a dynamic entrepreneurial culture and bold top-down policies is helping to deliver several world-leading companies.
Add in low valuations, low correlations with global equities, and inefficiencies that offer scope for alpha, and China’s fundamentals continue to excite. The question, therefore, is whether fear of China’s challenges should be balanced against ‘FOMO’: fear of missing out on the long-term opportunities it offers.
So then, the true story is, with growth slowing, policy risks rising, and geopolitical challenges likely to continue, the risk-adjusted return on investment in China has changed markedly in recent years, and no other country presents us with such radical change on such a large scale.