As China’s days of meteoric growth come to an end, can it find a way out of its lost decade?

China ended the decade with a growth slowdown, a drop in its current account surplus and a sizeable budget deficit
Having lifted millions out of poverty in the decades leading up to 2010, the country did not go far enough in the past 10 years to loosen government control

Richard Harris

Published: 1:00am, 10 Jan 2020

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The most frustrating part of investment is the sense that one always feels as if one is playing catch-up. When I was a young fund manager for one of the largest firms in Asia, we received the first call from the London brokers in the morning.

I was running international portfolios in Hong Kong time, so I was always around long before anyone else. The calls would come in before European trading had begun, but their best ideas had always risen in price before I heard about them. I realised then that even professionals are late in the game.

Technology has only made it quicker for us to miss out. Events move before we realise they have, but we also believe that trends continue a lot longer than they really do. In 2010, many believed it would be China’s decade and that the country’s meteoric economic growth would continue. China had lifted half a billion people out of poverty into an aspiring middle class in 30 years, engineering the most effective economic transformation in history.

Chinese gross domestic product rose by a staggering 1,100 per cent between 1992 and 2010. Its exports grew from 2 per cent of the world’s total to over 17 per cent. Income per head rose 970 per cent, 10 times faster than in the US. China’s economy was expected to overtake that of the US in size. It was simple maths.

But the low hanging fruit had already been plucked. There is an immutable rule in nature and economics that the bigger you are, the harder it is to grow.

Gone are those who forecast China would be the world’s uncontested economic superpower by 2020. In 2010, annual economic growth was 10.6 per cent but at the end of the decade it was 6.1 per cent according to the International Monetary Fund. Unofficially growth is probably nearer 2 per cent, in line with the US – but no one is brave enough to make that official.

Exports were growing at 29 per cent in 2010, but contracted in 2019, falling 1.1 per cent year on year in November last year. Chinese GDP per capita rose from around US$4,550 in 2010 to US$9,770 in 2018, but this is still only 15.5 per cent of the US’. The Chinese yuan is 2 per cent weaker.

The stock market, regarded as the best guide to economic performance, is up just 1 per cent in a decade. All that sound and fury signifying nothing.

The current account surplus has fallen from 4 per cent to just over 1.5 per cent of GDP. Foreign reserves are what they were in 2011 and fragile; 35 per cent is held in US Treasuries, but it is still less than 5 per cent of US government debt.

Students from Nongyong Primary School walk along a mountain trail to return to their village in Dahua Yao autonomous county in southern China in 2012. Over the 30 years leading up to 2010, China lifted 500 million people out of poverty. Photo: Xinhua

The Chinese government’s budget deficit is now a shocking 4.3 per cent, similar to the US’, and a whole percentage point higher than France’s. Italy’s is around 2.4 per cent, Greece has a small surplus. China’s total debt was US$40 trillion (15 per cent of world debt) in early 2019; over three times the size of the economy. It takes almost a third of GDP just to service it.

State-owned enterprises, devoid of moral hazard if they get it wrong, are by far the biggest corporate debtors at 67 per cent (up from 58 per cent in 2013), squeezing out private companies.

Is China serious about cracking down on its mountain of debt?

The Chinese economy in 2019 still had too many restrictions. Interest rates, set by the government, warp investment decisions.

The internet is so censored that it is hindering medical and scientific research. Two helpful policies, the crackdown on corruption and the one-child policy, have had ironic side-effects – one limits initiative and the other demand.

The lost decade of the 2010s is not because the whole world is against China, as some have argued. It is a Newtonian reaction to the enormous growth of the two decades before. China now has a fully developed economy so future progress will be measured in the improvement in the lives of the ordinary citizen.

The last decade was a start, with better housing for tens of millions and improved sanitation, communication, education and social welfare. Ninety per cent of the poorest 100 million people have been lifted out of poverty while infant mortality has sunk from 13.6 deaths per 1,000 in 2010 to 7.4 in 2018.

Is Xi Jinping’s goal to eradicate poverty in China sustainable?

The US, when it was still a developing economy, constitutionally pinpointed citizen aspirations as life, liberty and the pursuit of happiness. They are as entitled to be concerned about egregious unfairnesses without censure as they are about air, food, health and soil safety.

The lesson from the recent Hong Kong protests has been that people want to be left alone to get on with their lives legally, peacefully and in accordance with their beliefs.

I’ve just passed half a century in Hong Kong. My daughters read, write and speak Mandarin. I have a Chinese grandson. Three generations of my family studied at Peking University. I need China to succeed but we must have realistic expectations about what the 2020s will bring.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness

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