This week, we are coming back with the hotly debated topic of the Chinese economy, about to lurch into the jaws of death.
Let’s not be too dramatic and try to understand what is happening.
After decades of fast paced growth, the Chinese economy is seeing its growth rate slowing.
Is this something bad?
Well it may looks that way. After all, anything which is lower, slower is worse as per the dictionary.
However, the stock markets did not need to plunge more than 10% in the Western World and 40% in China if the stock market operators applied carefully some arithmetic.
The mathematics lesson is simple: high growth rates will generate higher and higher sums. Therefore, maintaining a high growth rate throughout times is tricky.
Let’s take a look at Chinese numbers.
In 2014, its Growth Domestic Product, a measure of economic output was USD10.4bn. This represented roughly 13% of the world’s total or the second largest economy, not too far from the weight of the Chinese population in the globe (around 18%).
The increase in GDP from 2013 to 2014 was USD867bn, which is the same as the entire GDP of 1996 or the entire economic output in 2014 of the Netherlands or Indonesia.
The increase from 2012 to 2014 was USD1.9trn, which is the Chinese entire GDP for 2004 (just 11 years ago) or an economic output delivered in 2014 by India!
Let’s imagine that China can keep its growth rate at 8% per annum until 2050.
If the world economy grows at 4% in the meantime, by 2030, China would represent 24% of the world economy. By 2040, a massive 35% and by 2050, a whopping 51%. Let’s remember that the US economy peaked at 23% of the world economy. This simple suggestion would tell us that the Chinese economy would be twice the weight of the US’s at the peak of the latter’s economic domination.
It could happen but the probability is very low and would suggest that the Chinese economy would be the only major economy really growing.
Therefore, the simple maths suggest that economic growth will moderate in the future in China.
And yet, countless CEOs of mining or energy companies have been neglecting this simple exercise, building capacity when it was not required.
Not sure these CEOs could solve this one!