The pure size of China means that any effects on its economy are there for all to experience. However, the size of it can also mean that plenty of misconceptions can be formed – many of which don’t have an ounce of truth.
The importance of this for the US investor should not be understated. You only have to take a look at a business like Bardwil Industries, run by the respected George Bardwil, to see how important China is for imports and helping his business evolve. The fact that this has been going for over 100 years highlights how the approach is most certainly long-term, even if markets can become volatile.
Taking this into account, let’s take a look at some of the biggest myths surrounding the Chinese economy and while certain topics should be taken with a pinch of salt.
“China’s economy only grows because of its cheap exports”
As we highlighted with the Bardwil example, China does rely heavily on its exports. In the case of that example again, Bardwil Industries sources a lot of its materials from China and it has learned to do this at an incredibly efficient rate.
However, don’t be under the impression that this nation is only in the business of exports. While the U.S. does hold a significant trade deficit against this country, one shouldn’t forget that China imports a lot of the raw materials that form the final goods. If we turn to the iPhone product – quite incredibly, even though this holds the “Made in China” label, just 4% of its value goes to Chinese manufacturers. The country turns to all sorts of other countries, such as Japan and Germany, to get the initial materials for this.
So, what does drive their economy? Physical capital is certainly up there and statistically speaking, roads, factories and general infrastructure has contributed to more than 50% of the growth of the nation.
“The renminbi will threaten the dollar”
There was significant news last year after the International Monetary Fund started to recognize China’s currency, the renminbi, as an official reserve currency. Naturally, this prompted questions on whether the US dollar’s worldwide dominance could be limited by this move.
However, the reality is hugely different. It’s understood that the renminbi is involved in about 25% of the country’s trade, but in terms of the global foreign exchange just 1% is comprised of it. With around 66% of the global foreign exchange reserves being made up of the US dollar – we can safely say that the current difference is substantial and fears about this are pretty invalid.
“The country manipulates its currency unfairly”
For years there have been question marks about China’s currency, and whether or not they manipulate it in their favor (and ultimately, to work against countries such as the U.S.). However, over recent times this has taken a change. The country allows its currency to fluctuate based more on market forces, but the reason that complaints are still prevalent is because at the moment at least, these market forces are working against countries such as the U.S. In other words, over time, things should even out.