I recently wrote about some of the misconceptions related to the Chinese economy. Today, I’d like to discuss how we believe the economy will evolve in the coming years.
While many commentators focus on how much further China has to go in terms of political, economic and social policy reform, anyone contemplating China’s future needs to understand where the country has come from. There is no disputing the fact that China has changed almost beyond recognition over the past 20-25 years. It is certainly very different from when I looked at China as an investor in the early 1990s. There is still more to be done, but in the last two decades China has made unparalleled gains in economic development, living standards and freedom of choice.
So what is China going to look like in the next 20-25 years? There is a lot of controversy about China’s new leaders and the country’s prospects for further reform and change. The overall view has been very pessimistic. The concerns are not illegitimate, but I believe they are unbalanced. While I’m not a political scientist, I can say that the principal themes in China – national pride and sovereignty, stability, and economic development – have been in place since Mao Zedong and are unlikely to change. So, when speculating about the future moves of Xi Jinping and other members of Communist Party’s fifth generation of leadership, it is important to remember that economic reform is ultimately equivalent to political and social stability.
Serious reform took a back seat to the robust economic growth China experienced over the last two decades. However, as the economy slows, we expect a new wave of reform to occur. In order to maintain social stability and accomplish the goal of encouraging domestic consumption, the government will have to create a more comprehensive safety net and focus on improving equality of opportunity. Additionally, liberalization of monetary policy and increased competition in the banking system will be key to improving credit and capital access for dynamic private sector companies. Land reform will also play an important part in unlocking massive potential productivity gains.
As we have said for years, we believe China’s growth rate will slow toward a more normalized 5%-7%, but even at that pace, China should continue to dominate global growth. I am very bullish on China – its economic growth prospects and the potential opportunities for discerning equity investors.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile.