China – The Next Economic Superpower or just the World’s Largest Economy?

August 20, 2021

By Mitchell Anthony


Is China the next Economic Superpower

You cannot talk about global economics without reference to China’s attempt to infringe upon America’s title of Supreme Economic Superpower.  There is clearly a race going on!  China’s monarchy has made significant progress at ending poverty in China and is now at work building a large middle class that can consume, pay taxes, and support a strong Government Budget.  The question that is on everyone’s mind however is: will China become a stronger economic powerhouse than America?  Rest assured they will soon become a larger economy than America but will they be superior and more powerful?

A Large Economy may or may not have power to wield.  Powerful Countries generally have:

  • High levels of Wealth to use to outspend other Countries.
  • Sophisticated Nuclear Weapons and advanced technology for defending against Nukes.
  • Strategic Global Alliances with powerful partners.
  • Products and services that the Globe wants and desperately needs
    • Weapons
    • Medical products and technology
    • Digital technology.
    • Artificial intelligence.

Does China have all of this that makes for Superpower status? This is complicated and difficult to answer.  The cutting edge products and services are generally in Technology.  American companies make some of the world’s fastest computers, deadliest jet fighters and most capable robots. These are very profitable industries with huge rewards for the leader.  Generally we find that China does not have better products and services than America but China is at least competitive in most major areas. The primary difference is that in America people are incentivized with an open economy and the ability for innovators to earn huge rewards – capitalism. China seemingly is trying to embrace this in some leading industries (ie tech), but still dug in with their historical position of complete control. Here is our score card from the data and opinions available.

  • Artificial Intelligence – America clearly has the lead.
  • Quantum Computing (mass processing of data)- Edge goes to US
  • Quantum Communications (transmission of data) 5G – Edge goes to China (Huawei). America has not prioritized 5G for various reasons.
  • Semiconductor Design – America clearly has the lead
  • Autonomous Vehicles – Edge goes to US


China could become the Globe’s Economic Superpower and displace America. However much would have to change here and there for that to occur.  Clearly China’s monarchy wants China to be the Globes Supreme Superpower. China has Nukes which is essential to superpower status.   China is trying to become a tech leader as well. China has a large developing middle class and China is building wealth rapidly.  Currently the Government has about a 3 trillion annual budget that is growing and has multi-billion dollar allocations for enticing other countries to align with their agenda. There are some areas of the world that are desperate and would embrace a partnership with a Communistic country that has had little regard for human rights (“Extreme Regime”).  Further, while America has 10 times the annual budget for foreign aid that China has America has spread itself thin and lost its focus on the importance of Alliances with other superpowers and has spent billions fighting terrorism that China looks away from. Unfortunately much of the American money seems to be wasted. China doesn’t officially report all aid so our estimates are just that.  Further the US has spent (wasted) most of its aid on military support to secure the middle east – failure. ie Afghanistan is biggest recipient recently. China is spending lots of $ in Africa for development – 45% of Chinese foreign aid.

We believe China has a difficult path in front of it and likely won’t become the Globe’s Economic Superpower and displace America anytime soon.  Key is the fact that the dollar is the reserve currency for the globe and everyone buys and sells goods in dollars not yuan. Both currencies have been strong relative to the amount of currency their central bank prints annually.  One dollar is worth 6.4 yuan currently.  Further problems include the fact that China is the extreme regime and the Globe knows this and does not trust them. China really has very little consumer wealth and their corporations are not mega cap like American counter parts with massive earnings and wealth.  More importantly, the Chinese Government is heavily laden with debt with still a relatively small budget for foreign Aid.  China is a distant 2nd or 3rd in the world of technology and innovation and China has very few meaningful alliances with other Global superpowers despite their substantial efforts to change this course.  China is however positioned for strong growth and their markets are undervalued for various reasons.  At the same time America will continue to grow as well and keep its strategic advantages over China.



What do we know about China?

China is currently the world’s second largest economy.  China’s Economy produces 16 Trillion in GDP, 2nd only to the USA which is 21T. China is the fastest growing mature economy in the world. GDP Averaged over 6% for last decade compared to 2.5% for the US.

Recent Data for GDP shows a big rebound in GDP from the depressed pandemic levels and now back to pre-pandemic levels

Goldman Sachs’ Forecast for GDP is bright but the forecast effectively has China slowing to 5% over the next few years.

  • 2022: 5.6%
  • 2023: 5.3%
  • 2024: 5.1%

China’s Manufacturing sector is the workhorse of the Chinese economy accounting for 50% of GDP.  Currently China is mostly a Manufacturing engine for Consumer and Industrial Products most of which are exported.  China also produces a lot of services but mostly consumer oriented services for use at home with some production of business services. China has always had a large trade surplus that is indicative of an export based economy.  The surplus is the largest in the world amounting to $45 Billion/month.  This has generally been flat but volatile for years.

China’s Annual Budget Deficit has become a problem.  They really had nothing meaningful until 2006 but since then their annual budget deficit has grown steadily and now exceeds 6.3 trillion yuan/year or $1 trillion US dollars.



The ruling party in China has cracked down from time to time on various parts of their private sector with regulations that have been stifling to earnings and growth. The latest episode began this year with regulation for the educational industry and spread to the tech sector again.  The Monarchy appears to be acting with good intentions that will benefit their economy and enable better long term growth and at the same time maintain their eminent control of everything in China. Previously they used harsh regulations to work to eliminate poverty in China.  Now with that goal mostly achieved they have struck a new path to build a wealthy middle class where equality is prevalent amongst the Chinese people.  They also want their population to grow and have asked the education industry to be nonprofit to make raising children more affordable. They asked Banks to minimize profits during the recovery from the great recession in 2007.  They are now asking Tech companies to be careful not to infringe on the rights of the competition and not use algorithms that gather data unfairly.

China’s obviously recognizes that to be successful in the globe they must be great in the world of tech and hence cannot use policies that will undermine innovation and development of leading edge technology. Given their recent actions Investors worry that this is not the case and they have run from Chinese markets worried that China will stumble badly here with policy and regulations.  This represents a value opportunity for optimists.

Breakdown of China’s Economic Activity

  • Agriculture (8%)
    • Accounts for approximately 28% of the total employed population.
    • Agriculture share of GDP is more in China compared to developed countries US/UK/Japan which makes up 1%.
  • Construction and Industry (38%) (mining, manufacturing of Finished goods, Industrial Products, and Technology related products) accounts for approximately 29% of total employed population
  • Services (54%)
    • Breakdown:
      • Transport, Storage and Post: 4.1%
      • Wholesale and Retail Trades: 9.4%
      • Hotel & Catering Services: 1.6%
      • Financial Services: 8.3%
      • Real Estate: 7.3%
      • Other Services: 23.3%
    • Accounts for approximately 43% of total employed population.
    • Services share of GDP in China is much lower than countries like the U.S. (79%), Japan (73%), Brazil (69%) and India (57%).

Despite China’s population being 5 times the size of America, monthly retail sales are essentially the same as the US.  Retail Sales in China are 3.2 trill yuan/month or 514 Bill dollars/month, compared to US retail sales of about 600 billion/month in the US.

Industrial Production is still the workhorse in China but growth has slowed significantly from the peak in 2010. The growth rate is still notable with a 6.4% gain y/y in July 2021.

China has relatively low inflation despite debt fueled consumption for last decade and tremendous expansion of the Central Banks (PBOC) balance sheet.  America is not the only country using monetary policy to inflate their way out of economic slowdowns.  Pre-Pandemic Core Inflation was averaging 1-1.5% with total inflation a mere 2-2.5%.  Levels are now only 1% enabling the bank to continue to Print Money as needed.

Wages are on the rise in China and have been so for the last decade.  Minimum wage in Beijing is 24 Yuan/hr ($3.71/hr).  Average monthly earnings are $1,225 USD while USA is $4,251. Generally wages have made tremendous progress over the last decade enabling China to talk about their emerging middle class.

China’s Total Govt. Debt is huge!

As of 2020, China’s government debt stands at approximately CN¥ 46 trillion Yuan (US$ 7.0 trillion), equivalent to about 45% of their GDP.  Standard & Poor’s Global Ratings has stated Chinese local governments may have an additional CN¥ 40 trillion Yuan ($5.8 trillion) in off-balance sheet debt as well. Furthermore, debt owed by state-owned industrial firms is another 74% of GDP (11Trillion) according to the International Monetary Fund. The three government-owned banks (China Development Bank, Agricultural Development Bank of China and Exim Bank of China) owe a further 29% of GDP (4.5 trillion).  China’s total debt appears to be about 27.5 trillion or 180% of GDP.

This high debt level is a current economic issue facing China. As a result China may have problems in the debt markets raising new capital given the bloated amount of debt on their balance sheet.

Why are Chinese Equites likely to move much higher over the year ahead and the next few years.

China has low inflation, very low interest rates, accommodative monetary policy, and an outlook for moderate earnings growth, which is nirvana for equity markets. China has a long term track record of Accommodative Central Bank Policy and a track record of monetizing financial problems.  The Central Bank’s (PBOC) Assets have grown to about 6 trillion from 4 trillion pre-pandemic and was less than 1 Trillion in 2006.  This is significant expansion of their balance sheet!  As a result assets prices have grown in value and will undoubtedly stay on this path. Equities in China sell at PE ratios of 15 or less compared to 20 or so in American Markets.

China is enjoying several notable consumption themes that are driving their economy. Corporate & Government spending on fixed investment for Urbanization of areas outside of Beijing began a decade ago and continues to grow each year.  Further, there is a growing middle class as the Chinese move from working in agriculture to urban jobs causing increased consumption of housing, autos, food, energy, & leisure. While China will not be the worlds supreme super power anytime soon, they almost certainly are a big economy with more wealth, consumption, technology, etc that should be supportive of their equity markets.

Chinese stocks are currently discounting the risk that government regulation may play on the growth of different sectors of their economy.  We see this as a reason to Buy rather than sell. Specifically the equity segments we are in involved in regard tech and ecommerce consumer areas where there is likely less gov’t regulation and more incentives from the party to let these industries innovate.

As a result of the evidence noted above we believe Chinese Equities are positioned for strong Earnings Growth and Valuations are headed much higher.