Wasn’t China suppose to collapse?
Turn on the news, what do you hear? “Chinese Communist Party insert trending topic is harming American Democracy.” Some form or version of that lingo has consistently been spewed about China. Remember when Evergrande was going to crash the global economy? Never happened. In fact, the S&P 500 is up over 70% since 2022, and the Shanhai Composite Index remains steady1 In fact, Chinese markets broke out September 2024 over 17% in just 2 weeks. So is the mainstream media spreading false information, preventing you from lucrative opportunities? Lets look closer…beyond the headlines 👀
Overview of China’s Economy
One of the coolest features of being a creator, is being able to connect with people world wide, actually living in the various economies we cover. A gentleman from China explained to me: “Old people’s retirement money is good. They can pay for their living. Young people are giving up”. This sounds nearly identical to the generational conflicts between younger age demographics such as Gen-Z, Millenials and Baby Boomers here in the United States. The gap between wages and cost of living for Baby Boomers was far narrower in their youth…so even though their wages were smaller, they were more capable of setting aside savings for first time home buying, or other needs. The chart below is one of many economic examples of various necessities that the gap has widened exponentially. Older generations fight with younger generations about the economy, basing their points on personal experience, rather than economic understanding…in fact, two thirds of people don’t even understand that the dollar loses value in times of inflation2 Two very different economic experiences for two different generations, yet both age demographics suffer from economic illiteracy. From the gentleman’s comment, it appears China is suffering in the same way as Americans.
We wanted confirm that China’s economy is similar to the American economy. As in, they say it is great…but is that “greatness” at the sacrifice of its own citizens? The answer is a resounding yes. We needed an easy way to visually demonstrate a growing wealth gap. The National Bureau of Statistic of China3 provides data on a multitude of economic variables. For measure, we decided on utilize total wage bills4, which is the total amount of money paid by an organization, industry or economy to its employees; and per capita disposable income of households5, which essentially tells us how much money Chinese citizens have left over after expenses. After compiling the data, the disparity was as expected.
Similar to the American economy, the Chinese Economy appears to be doing well, from a technical definition viewpoint. The Chinese GDP6 generally trending up year by year, a mathematical courtesy of their respective corporations making more money year over year. Alibaba, the 7th largest company in China by market capitalization7 generated $131B in revenue in 2023, compared to $105B in 2020 and $37B in 2017. This dramatic increase in revenue can be seen with most large corporations across China, such as Tencent, largest company in China by market capitalization. As a final demonstration that the Chinese economy is strong on paper, yet the economic crisis for middle class and poor Chinese citizens remains, the graph below demonstrates major city salaries vs. housing.
Another noticeable trend shift started around 2014, where employment generally trended upwards, peaking at 76,349 persons employed per 10,000 people8. Though there has not been a dramatic drop, the general trend has at least started a descent the last 10+ years. Whether this trend continues or not, time will tell, regardless, the saying “trend is your friend” remains true. My speculation is that unemployment will increase over time, as Chinese companies are embracing new technology, such as Artificial Intelligence, just as must as America is. This is generally not a good long term signal.
Finally, interest rates in China have been dropping for more than a decade, with China loan prime rates currently at 3.1%9. Recall that dropping interest rates are generally bullish for assets, however they indicate that a problem exists. The respective government is trying to fix a problem. For example, here in the United States, when the COVID pandemic crushed businesses both large and small, the Federal Reserve slashed interest rates to boost the economy…in which many would argue they over-achieved that goal. The massive cuts in interest rates, coupled with massive money printing, resulted in massive inflation. China additionally, continues to print money10 at a steady, consistent rate. Both of these individual factors, are generally considered bullish.
The conclusion of this general China economic review: similar to the United Sates, China’s economy looks great on paper, from a high level, however they are facing just as much of an economic crisis for ordinary citizens as American middle class and poor are. Corporate success presents a healthy Chinese economy, however a massive disparity is growing between its normal citizens and the Chinese wealthy, demonstrated by employment decreasing since 2014 and disposable income becoming a smaller fraction of total wage bills. However the consistent downward trend of interest rates and increasing money supply should prop Chinese assets, right? All of this information considered…where are Chinese stocks heading? Specifically Alibaba, JD.com and etf’s such as MCHI and FXI?
