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Absolutely Yes, China Can Keep The Growing Momentum

Few friends, especially international friends, doubt China's development and believe the economy is slowing down. True, China is slowing down from 12% to 7-8% in terms of GDP growth and there are some problems with the planned economy system, reporting and asset bubbles. However, the overall economy is still healthy and dynamic. I believe China will become the largest economy soon and can maintain the current speed of development for many years. Why? The system, productivity, and plenty drivers for growth.

1. Chinese economic system is absolutely not Stalinist and it is a combination of Neo-classicism with limited planning economy. The central government controls state owned enterprises, big banks and some crucial resources. The government make strategic plans and intervenes the market when necessary. Sometimes the central government screws up, for example they created asset bubbles when they stimulated the economy. Other than that, it is market economy and the system works very well. Most policy makers have good understanding of US economy and their ability of managing the economy is fairly good. They have the leeway to make policies with the help of the government.

Few achievements of Chinese government:

1) Stimulated the economy in the latest financial crisis.

2) Turns China into world manufacturing centre and supports high tech and industries with social benefits.

3) Waive taxes of all farmers and introduced free education up to high schools and Medicare which covers around 90% of expenses for serious diseases.

4) Build huge international trade surplus and reserve (people resent about the weak currency policy and subsidies).

5) Politically, China is very stable, even though democracy is terrible.

2. The economy is still healthy and Chinese economy is very productive. A big chunk of products of the whole world are made in China, and China is catching up in high tech like clean energy, e-commerce, mobile and electronics. Corporate profit margin is high, unemployment rate is low, and inflation is OK. Most Fortune 500 companies are Chinese and Top 3 are Chinese companies.

Few concerns:

Debt ratio is getting close to 250% of GDP, but it is controllable. The SOEs have high debt ratio but the private companies and individuals have high saving rates! According to renowned economists, the high ratio of commercial savings explain why Chinese companies can succeed in competition: high retention rate and high ROI of the reinvestment.

Shadow banking can be a trouble but the big banks are controlled by the central government, so it is OK. Most banks are very healthy. SOEs and big banks should stop lending money to SMEs.

Property bubble is a big headache. The government has realised they need to cool down the market while they cannot burst the bubble. The asset price in the 4 first tier cities, esp in Beijing and Shanghai, are crazy and they are regulated. The second tier cities are healthy. Some 3rd to 4th tier cities oversupply properties, but only less than 60% of population lives in the cities, so more people will move to the cities and buy the property there.

Pollution is serious, corruption is disgusting, cronyism is terrible and the society does not have sufficient democracy.

3. The Prospectus is good, because China has a lot of moats and potentials to grow.

1) Urbanisation has not finished yet. More people will move to cities, which will support infrastructure and property markets.

2) The labor cost is getting higher, but the manufacturing costs are still low. China has very good infrastructure, industrial clusters and supply chains, which helps it take manufacturing jobs from Japan, Korea, India and Taiwan, and makes it very hard for other countries to steal away jobs. The education and open-up have trained good talents.

3) China government is pro-innovation. Chinese companies used to be manufacturers and copycats. Now, many companies like Alibaba, Tencent, Lenovo are pretty innovative. The government give a lot of leeway to innovations. The companies have learned how to play the game in world markets, including finance. China is a good follower to US in many aspects. Almost every people in China has mobiles, cars, and computers. Their technology is not bad.

4) Once a country's GDP per capita goes above USD 10,000 a year, the country will grow on its domestic consumption. Chinese economy used to depend on property, investment and exports. The landscape is changing. There are more wealthy people. Many people have property, savings and stable income. They start consuming. It means, people will eat better food, travel more, ask for better medicine, have better entertainment, etc. 1.4 billion people can consume a lot, esp. when they start using their credit cards.

5) Finally, finance. There are a lot of banks, exchanges, including Hong Kong Stock Exchange. More Chinese companies are listed in US and less will have corporate governance issues. If Renminbi and the financial markets are opened up more, Chinese stock market will boom like what US market did in 60s to 90s.

I am optimistic and I feel you and I are lucky because we are in a good position to enjoy the development of China and boom of the investment market of China.

Sorry, it is a bit long and messy. Thanks for reading it.