At the same time China needs to make better efforts in patent protection and this as an area of concern that could hold China back. For a country the size of China, the state of digital and physical infrastructure is much better than its emerging market peers. It still needs to do a lot more to catch up to OECD standards, however.
Human development
During his time in office Premier Wen Jiabao remarked that China had met its stated goal of education spending targeted at 4% of GDP (the target was set in 1993). The government spent $1.25 billion from 2008 to 2012 with an average annual increase of 21.6%, or 4% of the nation’s GDP in 2012. The government plans to maintain spending at 4% of GDP and increase monitoring of how funds are spent.
According to Bloomberg, healthcare spending in China is expected to triple to 1 trillion by 2020, driven mostly by an aging population and government efforts to broaden insurance coverage. According to McKinsey, China is expected to increase healthcare spending from 5.5% of GDP to 7% of GDP. The government is looking to provide a safety net for the large portion of the population that will be retiring in the coming decades.
China is making a $250 billion a year investment in human capital in an effort to create a broadly educated workforce.
Meanwhile, private industry is also taking the lead to make sure the graduates they are hiring have the skills to be productive in their jobs. For example, carmaker Geely has started the Beijing Geely University that trains about 20,000 students in science and engineering, specifically in auto engineering.
In the last decade China has doubled the number of colleges and universities to 2409 and produces 8 million graduates a year. China is aiming for a large, more broadly skilled workforce to compete with the West as it looks to take the lead in several industries including alternative energy, energy efficiency, environmental protection, biotechnology, advanced information technologies, and high-end equipment manufacturing.
China gets a score of 59.57 out of 100 in the social Bloomberg ESG rankings.
Conclusion
China has so far done a good job when it comes to education and healthcare spending. It has to encourage the private sector to share in this investment so that more young people have the skills necessary to prosper in the knowledge economy, where skills need to be constantly upgraded.
Environment
China gets a score of 34.53 out of 100 in the environmental Bloomberg ESG rankings. Examining Exhibit 10 below, we can see that China’s low score is a result of high carbon imports, high carbon dioxide per capita and low forest area as a percentage of total land area.
Exhibit 10 – Environmental ranking percentile
Conclusion
China has the worst ranking among the BRICs and needs to do a lot more to protect its environment.
Capital markets
Exhibit 11 illustrates the performance of the Hang Seng Index over the last 12 years. The beginning of a bull run can be seen in 2002, which coincided with the spectacular GDP growth numbers that China put up in the beginning of the decade. We then see the crash of 2008 and the emerging market rally of 2009 that took market pundits by surprise. The choppiness that we see from 2010 coincides with market realisation that China’s growth rate will slow in the coming decades.
Exhibit 11 – Hang Seng Index (in US$)
Data: Bloomberg
China’s capital markets, especially its public markets, remain plagued by insider trading. The government has cracked down on this practice and has promised to reduce government involvement in approving IPOs, but its promises have yet to be backed up by action. The Chinese securities watchdog has moved to liberalise the stock market by removing the limits on investment by foreign investors.
The public markets indices are dominated by state-owned enterprises, which in turn mostly consist of energy and financial services companies. Consumer staples and consumer discretionary only consist of 3.5% of the Chinese H-shares index, giving investors little exposure to the China consumption story.
Exhibit 12 gives a breakdown of the H-shares Index. As seen in the chart, energy and financials which are typically state owned dominate. This share can be expected to decline, particularly in the financials sector, as the government moves towards liberalisation.
Exhibit 12 – Breakdown of China’s H-shares Index
Data: Bloomberg
According to the World Economic Forum’s 2012 Financial Development Report, China ranked 20th (out of 60 countries) which was above all other BRIC countries. The ranking has seven sub-pillars that make up the overall ranking.
China ranks best on the fifth (4th place) and fourth (17th place) pillars, which represent Non-Banking Financial Services and Financial Services respectively.
It ranks worst on the second (47th) and seventh (41st) pillars, which represent Business Environment and Financial Access respectively.
Its rank is pretty mediocre on the third (20th), sixth (21st) and first (35th) pillars, which represent Financial Stability, Financial Markets and Institutional Environment.
Conclusion
A lot more needs to be done to crack down on insider trading and improve the general level of disclosure coming from the financial statements of publicly listed Chinese companies.
In a nutshell
Strengths
Massive foreign reserves to cushion a financial crisis.
Robust increase in domestic consumption due to rapid urbanisation and growth of second-tier cities.
Increasing adoption of mobile phones and increasing internet usage.
High-quality infrastructure in urban centres that has removed bottlenecks for growth that still hamper emerging market rivals.
Dominance in manufacturing and exports that has lifted millions out of poverty and created the aforementioned massive foreign reserves.
Increasing spending on health, education and job skills.
Weaknesses
The risk of a real estate bubble and slowdown due to overinvestment.
Lack
