Main drivers of the Chinese economy

In 2019, China has the world’s second-largest economy with a GDP of $ 14.3 trillion, behind the United States’ GDP of $ 21.4 trillion.If the economy was represented by purchasing power parity (PPP), China leads America as the largest economy with a purchasing power of $ 23.5 trillion.

How did China go from a poor society, devastated by WWII and its own civil war in the mid-20th century, to the second largest economy today? After decades of economic stagnation and setbacks under the Communist regime, China began to open up to international trade and liberalize the economy when it established diplomatic and trade relations with the United States in 1979. is became a major global economic power over the next four decades.

China has been criticized for how its economy has been able to maintain an average annual growth of nearly 10%, although this has slowed in recent years, growing 6% in 2019, still within target. growth in China. Namely, the government has been accused of manipulating the currency to keep Chinese exports attractive and failing to discipline companies that engage in intellectual property theft.

Industrial growth

Like most countries seeking to develop their economies, China’s first step has been to develop its heavy industry. Today, China is the world’s leading manufacturer and produces almost half of the world’s steel.

The Chinese mining industry extracts coal, iron ore, salt, oil, gas and gold. To reduce China’s dependence on coal, the country is moving towards more renewable resources and plans to increase its consumption of natural gas in the coming years. China also has multiple oil reserves, as well as natural gas fields that have yet to be fully explored.

The country is also a good candidate for hydropower generation, and in 2012 the Three Gorges Dam was completed and is now a major power producer for cities in southern China (including Shanghai).

Manufacturing income

Most Americans know that China is a manufacturing power. In addition to its large textile manufacturing sector, the economy also supplies machinery, cement, food processing products, transportation devices (trains, airplanes and automobiles), consumer goods and electronics.

Not only does China have many domestic companies that create hardware and software, but the country is also one of the major assemblers of foreign electronics. China’s software and information technology industry grew by more than 14.2% between 2018 and 2019, generating revenue of around $ 940 billion.

Likewise, China produces automobiles in factories owned both domestically and by foreign companies. However, most automobiles, both domestic and foreign brands, are purchased by people in China, a country with 340 million vehicles in 2019. Chinese vehicle sales fell 8.2% in 2019.

China’s auto industry is criticized for intellectual property theft and a poor safety record with cars produced by domestic companies. The majority of cars produced by Chinese companies are exported to Africa, South America, the Middle East or Russia. Due to China’s unique distribution and sales methods, auto dealers and sellers make a high margin on every vehicle sale.

Large production pharmaceuticals

The Chinese pharmaceutical industry is, like the rest of China, growing rapidly. The Chinese drug distribution system has several phases: drugs pass through various levels and expensive intermediaries before reaching hospitals and pharmacies. This industry is, once again, plagued by criticism of intellectual property theft.

Domestic companies represent the majority of the market, but international companies like Pfizer (PFE), GlaxoSmithKline (GSK), Novartis (NVS) and AstraZeneca (AZN) are also present. With China’s reform and regulation of the pharmaceutical industry (increasing access to OTCs and enforcing patents), there is a high potential for growth in investment in this area.

Chinese consumerism

Whereas once a country of rationing and scarcity of consumer goods, after economic liberalization, China can be a consumer paradise for the few with means and a love for luxury goods. China is home to some of the largest shopping malls in the world, and in addition to wholesaling, retailing contributed $ 1.8 trillion to GDP.

Companies like Alibaba (BABA) have given a boost to retail and e-commerce. Alibaba’s Singles Day sale in 2019 saw a record $ 38 billion in single-day sales.??

In 2019, travel and tourism in China contributed $ 992 billion to Chinese GDP. Other important services in China include transportation, real estate, and construction.

China’s economic concerns

While China’s growth seemed unstoppable at one point, there are obvious cracks in the economy that have slowed it down. First, the country has come under fire for the amount of non-renewable resources it burns each year. With China already considered a major polluter and emitter of greenhouse gases, the expected increase in coal use is worrying for some.

Second, China is the hotbed of rampant corruption. The national government is actively trying to eradicate it in an attempt to make the country more business-friendly for Westerners and to avoid the economic and business inefficiencies that stem from corruption.

Finally, there is the problem of underemployment and inflation in China. Chinese farmers on small plots of land are marginally useful and, in an efficient market, would be unemployed. Although inflation in 2019 reached a manageable level of 2.3%, the past 20 years have seen the inflation rate fluctuate wildly, a concern for companies wishing to invest in the country.

The bottom line

China has the first or the second largest economy in the world depending on whether you look at the GDP or the PPP. However, perhaps significantly, the country is not as developed as the other top 10 countries. Public spending is a key driver of growth that has led to blind construction in recent years. Even with the world’s largest population, China has struggled to find buyers for real estate in its ghost towns. But the government’s latest program focuses on stimulus to revitalize economic activity and if that happens, the country has huge room for growth.

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