Why is China important to the World’s Economy? I’m not a political science major so I am not commentary on China’s politics, but I will try to give some insight into why China matters economically.
Remember when “Made in China” was on the bottom of every toy? In the early 1970’s The United States and China began discussions on opening China to receive our domestic imports and doing more business. China had the manufacturing capabilities and the workforce, but not yet the logistics or politics. But soon China would become known as “the world’s factory”. Here is some insight as to how:
Size and Population: China is the third largest country, land mass wise, in the world and first in population. Land mass translates to available resources. Population translates to a huge workforce (also a resource) and eventually a large consumer base. Together this creates a significant market for China.
Economic Growth: China has averaged a 6-7% average annual growth rate making it the second largest economy in the world, increasing its importance on the world stage. It’s important to note that growth doesn’t necessarily mean personal “socio-economic” growth. The lifestyle you and I have compared to the growing Chinese middle class is a higher quality.
Manufacturing Powerhouse: China is known as “the world’s factory” due to its large and varied manufacturing sector. China has invested heavily in infrastructure and logistics over the last several decades and is well developed to handle the economic growth. Even though their workforce still makes a relatively low wage, by US standards, they have a robust skilled and semi-skilled labor force. They have moved on from toys and textiles to include manufacturing and electronics, which they export globally.
Global Trade: Speaking of exporting globally, China is now the world’s largest exporter and second largest importer of goods in the world. Their integration into global supply chains has enabled them to capitalize on their powerhouse manufacturing. As mentioned earlier China invested heavily in its own logistics which tied the many remote manufacturing territories together. This allowed the Chinese government to build and improve their internal supply chains, resulting in the securing of international trade and supply chains. This led to a trade surplus and enabled China to become a major player in the global finance markets.
Foreign Direct Investment: All these factors have made China attractive for multinational corporations seeking investment opportunities into this massive market and the manufacturing powerhouse. The Chinese government has worked hard at developing policies to encourage these investments. They have established special economic zones specifically to attract foreign business and investment.
Infrastructure and Development: I’ve mentioned this a couple of times, but China has indeed invested heavily in its roads, railways, ports and airports which has connected these special economic zones. These improvements not only help move the goods but also the people/workforce. Movement is good for economic development in other regions of China.
Technology and Innovation: Whereas we used to know China for toys, probably the most recognizable area where China has excelled is in technology. They have invested heavily in research and development, creating some giant tech companies. China has become a leader in AI, FinTech, e-commerce and renewable energy which has in turn driven its ascent to the economic elite.
It's important to remember that China is still an authoritarian form of government. The central government’s involvement in corporate decision making might hinder economic growth rather than spurring it on. When I was a young adult, there was much talk of Japan or Germany or even Russia overtaking the US as the world’s economic power, it never happened. While China might be able to keep pace with the United States, the US dollar is still the worlds reserve currency and the standard for financial and economic strength.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.