At a recent gathering at the Asia Society in New York, I highlighted several economic misconceptions related to China. Some of these have become so imbedded in investors’ thinking that I believe they risk missing an opportunity. For investors to be able to take advantage of China’s next chapter, they need to be able to separate fact from fiction. Here are three of the most common incorrect assumptions about the world’s second largest economy.

China’s growth is dependent on exports

It is true that China is a large exporter on an absolute basis; it accounts for close to 10% of the world’s export market. But in reality, it is actually less dependent on global trade than many other countries. For example, in 2010, more than half of South Korea’s GDP came from exports.¹ Compare that to China, where exports accounted for just 30% of GDP.¹ Even Germany has been more reliant on external demand than China, with exports comprising 47% of German GDP. The fact is that China’s growth story has been more than just about trade. It is, ultimately, a story of restructuring its own economy and increasing productivity.

China has misallocated capital in a historically unparalleled fashion

There has indeed been a pick-up in capital investment following the recent financial crisis. Prior to 2008, capital investment had been on a downward trend as a percentage of GDP growth, going from 67% of growth in the 1990s to 54% in 2001-2007.² Productivity growth, on the other hand, had been steadily improving as a result of economic reform. Since the crisis, capital investments have gotten back up to 68% of GDP growth, in part a result of the stimulus program put in place to support the economy. ² It is obvious that some of the stimulus went into unproductive assets, but much of it was spent judiciously on projects such as improving infrastructure, housing, and research and development. That type of spending should have a positive long-term impact.

China is fragile due to a credit and property bubble

I believe that some investors are mistakenly using the U.S. housing bubble as a playbook for China’s property market. While there was a speculative component to the boom in Chinese real estate in the 2000s, price increases were largely a result of property market reform in the 1990s and strong underlying demand for new homes. Additionally, the leverage used to buy property was nowhere near the scale used in the U.S. At the same time, the impact on China’s very liquid banking system has yet to come anywhere near crisis levels seen here in the U.S. and parts of Europe. We’ve actually already seen stabilization in pricing and inventories.

As China moves forward under newly appointed leadership, it should continue to dominate global growth. Furthermore, the shift in the composition of economic growth presents opportunities for investors willing to look past the headlines and misconceptions, and focus on the companies that have the potential to dominate the New China.

1. Source: World Bank, 2010
2. Source: Emerging Advisor Group

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