China: A $12 Trillion Economy Not to be Ignored

China remains an important part of the world economy. China: A $12 Trillion Economy Not to be Ignored. While it may not be posting the double-digit growth numbers of a decade ago, we believe the country continues to offer interesting investment opportunities. Although recent economic growth rates have been in the single digits (6.90% in 2015 as shown in the chart below), in absolute terms this growth is extraordinary given that China’s economy is far bigger than it once was. What was China’s $1 trillion sized-economy in 2000 is now 12 times larger at more than $12 trillion based on gross domestic product (GDP), putting China just behind the U.S. ($19 trillion).1

Concern over Capital Outflows Abates

We continue to believe that when evaluating any investment in either the emerging markets or any global allocation of assets, China needs to be considered. Although current concern surrounding China’s capital outflows may have decreased, there continues to be net depreciation pressure on the Renminbi. However, in some ways, mild, engineered depreciation versus a basket of currencies, while keeping a lid on capital outflow pressures, may represent a positive outcome for China. Market concern has tended to focus more on the rapid increase in leverage that has been seen in China since the global financial crisis. Although we agree that this is a significant issue that will likely necessitate some hard decisions, we think that there are serious differences in the nature of that debt and the management of the economy that could prevent a systemic crisis in the foreseeable future.

Debt Burden is Larger for SOEs

Much of the debt risk concern is around state owned enterprises, or SOEs. Privately owned enterprises tend not to carry as much debt. According to estimates in a paper published in June 2016 from Shi Kang, an associate professor at Chinese University of Hong Kong, private companies have cut debt to 53% of assets in 2013 from 58% in 2007, while SOEs have seen those figures jump to 62% from 55%.2

China’s New Economy Transition

Small and medium enterprises (SMEs) remain at the center of the narrative as China transitions from an “old” production-driven model to the “new” consumer and service-led economy. In this context, we believe VanEck Vectors™ ChinaAMC SME-ChiNext ETF (NYSE Arca: CNXT®) provides not only exposure primarily to China’s market for innovative, non-government owned companies, but also to the very sectors that are increasingly recognized as underpinning the growth of the country’s “New Economy.” CNXT gives investors a liquid, transparent way to gain access to some of these growing companies.

China GDP Absolute Growth and Growth Rate (2000 – 2015)

(Click to enlarge)

Source: World Bank. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

IMPORTANT DEFINITIONS AND DISCLOSURES

1 Estimated; Data: IMF, World Economic Outlook; Updated Feb. 11, 2016
2 Bloomberg: China Private Firms Show Way Out of Debt Trap for State Giants.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders during one year.

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