By Andy Mok for China Brain.
For China’s economy, 2016 is both the best of times and the worst of times. To carry on with the Dickensian analogy, many in China bask in a balmy spring of hope while others endure a punishing winter of despair.
At the national level, as the table below shows, China is doing well compared to its peers. While the size of China’s economy is comparable to those of the developed countries, its growth rate remains a multiple of theirs. Also, because China’s GDP methodology relies on direct reporting by large enterprises but only a sampling of SMEs, the smaller (and fastest growing ones) are likely to be under-represented. As such, actual GDP growth is higher than reported.
Meanwhile, despite India’s growth rate being comparable to that of China’s, it lags far behind in both nominal and per capita GDP terms with the kind of political and other structural impediments that make it unlikely to close this gap in the near term.
More importantly, the rebalancing of China’s economy is well underway with services recording a real increase of 8%, which is above overall GDP growth, and now accounting for 50% of total output. Solid retail sales growth of 10.6% also points to the growing importance of consumption and positive long-term changes in the composition of GDP.
| China | Euro Area | US | Japan | India | |
| Population (million) | 1,375 | 338 | 322 | 127 | 1,254 |
| GDP, nominal ($ billion) | 10,355 | 13,410 | 17,419 | 4,601 | 2,067 |
| GDP YoY | 6.7% | 1.6% | 2.0% | 0.7% | 7.3% |
| Inflation rate | 2.3% | 0.0% | 0.9% | 0.3% | 4.8% |
| Unemployment rate | 4.1% | 10.3% | 5.0% | 3.3% | 4.9% |
This is all well and good from a macro perspective. But the headline GDP figure also masks both the strength and optimism in China’s new economy while also perhaps understating the severity of the structural challenges facing China’s old economy. Jim McGregor, author of One Billion Customers, has referred to China as both the world’s biggest startup and the world’s biggest turnaround. The startup is booming while the turnaround is struggling.
The new economy is led by the post 90s generation: Brash and optimistic, well-educated, service-based and mostly centered on the coastal cities of China. Meanwhile, the old economy is traditional and conservative, older, blue collar and manufacturing-oriented, slower to adapt to new global realities and mostly based in the Tier 2+ industrial cities of Northeastern and Northwestern China.
As shown in the table below, the economic disparities are striking (and, absent government intervention), likely to grow even larger.
| Beijing | China | Shanxi | Gansu | |
| Population (million) | 21.56 | 1,375 | 36.48 | 25.91 |
| GDP, nominal ($ billion) | $369.60 | $10,355.00 | $205.60 | $109.06 |
| GDP per capita, USD | $17,143 | $7,925 | $5,636 | $4,209 |
| GDP per capita vs Beijing | 1.00 | 0.46 | 0.33 | 0.25 |
The new economy is firing on all cylinders. Investment capital is abundant with traditional VC funds like GGV having recently raised $1B+ new funds while corporate titans like BAT (Baidu, Alibaba, Tencent) continue to invest ever larger sums in startups and acquisitions both inside and outside of China to bolster their competitive positions. According to a recently released survey by SPD Silicon Valley Bank 85% of Chinese startups surveyed expect business conditions in 2016 to be better than that of last year, which was higher than the 64 percent in the US and 58 percent in the UK.
The explosion in e-commerce is one cause for this optimism. According to eMarketer, China’s shoppers spent $672 billion online in 2015 with $1.21 trillion forecast for 2017. While growth rates are anticipated to fall from 42% in 2015 to 30% in 2018, the opportunities are enormous in both absolute GMV (gross merchandise value) and percentage growth terms. It’s also worth mentioning that online sales in China accounted for 16% of all retail sales in 2015 and are expected to rise to 30% in 2018.
The further mainstream adoption and globalization of augmented reality/virtual reality, drones and robotics will also bring rapid and large benefits to Chinese entrepreneurs and their investors, both domestic and foreign.
Inland, things are bleak. Not only are key economic indicators generally below national averages, but former pillar industries undergirding the proletarian ideal such as steel, cement and mining are in secular decline. Furthermore, because both labor and capital goods are not as fully fungible as microeconomic theory describes, systemic redeployment of these factors of production is doubtful.
The good news is that the central government has both the financial and intellectual horsepower to address these problems. Besides one-time ex gratia payments to laid off workers, it would not be surprising to see cutting edge policy responses such as an unconditional basic income as part of an integrated set of policy responses to ameliorate the structural dichotomy between China’s new and old economies.
So, while China’s two economies face very different prospects, the country is governed and united by a strong single-party system that has the will and capacity to address the challenges of the old economy. While past performance doesn’t predict future performance, that is certainly the way to bet. Given the success of China’s leadership in navigating past development crises, perhaps this is just one more victory on the road to the rejuvenation of the Chinese nation.