China – Setting the Stage for Long-Term Disappointment?

China – Setting the Stage for Long-Term Disappointment?

Highlights:

  • The Chinese government has laid out a plan for China to become a fully developed nation by the year 2049.
  • In order to achieve this goal, we estimate that China’s annual growth rate through 2049 would need to be significantly higher than the annual average growth rate of the Organization for Economic Cooperation and Development (OECD) member nations over the same period.
  • Based on the calculations used in this one exercise, the likelihood of China reaching fully developed status by its goal year appears low.

China’s President, Xi Jinping, recently laid out the blueprint for his nation’s development over the next three decades. Important goals noted were eliminating poverty, reducing pollution and controlling risk in the financial system.

The plans, unveiled at the 19th National Party Conference, also set a goal of being “a fully developed nation by 2049,” the 100th anniversary of the People’s Republic. While it is not entirely clear what that expression means, and the Chinese government has backed off on providing more quantitative statements for its long-term objectives, we can attempt to determine just how lofty a goal it might be. 

What Might It Take for China to Become “A Fully Developed Nation” by 2049?

For the purposes of exploring the possibility of China becoming “fully developed,” we could measure it in terms of gross domestic product (GDP) per person (per capita – GDPPC). 

We take the average GDPPC of the OECD’s 36 countries, as of the most recent data in current U.S. dollars, which is $38,900 (we could use purchasing power parity, but it is difficult to think about inflation and cost of living levels over the next three decades). China, with a current GDPPC of $8,600 is far behind that level, so the goal would simply be to catch up over the period from now until 2049’s target date.

We should conservatively adjust the OECD GDPPC average, as there will be some growth and the current level will increase over that period. If the growth in GDPPC is a measly 0.8% per year, which is the average rate of GDP growth for the OECD over the last decade (a historically slow rate) we end up with a target GDPPC of around $50,000. This represents the conservatively projected GDP per person in 2049 for the average OECD country. 

Next, we take the OECD’s population estimate for China for the year 2050 of 1.38 billion people (note that the 2010 population was pegged at 1.36 billion, so almost no growth). If we simply multiply our $50,000 by the 2050 population, we end with a total GDP of $68 trillion. In other words, in order to achieve the target “average” GDPPC, China’s GDP would have to grow over 32 years to be $68 trillion. Given a current total GDP of around $15 trillion, this implies an average annual growth rate of about 4.8% a year – for 32 years.  

If we then extend our calculation to compare the total GDP of China to that of the rest of the OECD (assuming all OECD countries grow at the same conservative average rate of 0.8% per year), we note that China would end up having a total GDP that almost matches the GDP of the entire OECD, including the U.S. The likelihood of a single country growing as much as these 36 economies combined is extremely low.

Is It Possible for China to Achieve Its Growth Goal? 

Certainly many things in this world have come to fruition that were widely considered unimaginable. Yet there are many more circumstances where the past was extrapolated into the future only to discover it was a poor assumption. Our calculations above do not account for a number of other developing countries with substantial populations and low current levels of GDP per capita. They also have the opportunity to grow substantially and attain a closer to fully developed status. 

There is no doubt that China’s potential is vast. There is equally little disagreement that politically, economically, and militarily, it will be a major force in the world’s future – likely surpassing the U.S. by some measures. However, the attainment of such a lofty goal even over the next 30-plus years appears, at least, implausible. President Xi and investors should adjust expectations accordingly.  

Segal Marco Advisors provides consulting advice on asset allocation, investment strategy, manager searches, performance measurement and related issues. The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Segal Marco Advisors’ R2 Blog and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. Please contact Segal Marco Advisors or another qualified investment professional for advice regarding the evaluation of any specific information, opinion, advice, or other content. Of course, on all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.

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