China’s Problem: GDP Growth Without Wealth Creation
I was listening to an interview that Bloomberg conducted with Hugh Hendry (it was a recent Odd Lots episode), a hedge fund manager. And one thing he said really stuck with me. Paraphrasing from memory, I think he said:
“China is really good at producing GDP growth, but it’s really bad at producing wealth growth.”
This is a really interesting distinction and it crystallizes the reason why despite the impressive size of their economy, average citizens in countries like China still seem much less well off than their American and European peers. It also clarifies why an investor in Chinese equities has lost money even over longer horizons (see below) despite China’s GDP growing at 6–7% for as long as I can remember.
GDP growth is relatively easy to create especially if you’re an autocratic government like China’s. Governments with a lot of sway over the financial sector can force banks to lend in support of infrastructure, real estate development, etc. When capital costs next to nothing, a lot of foolish projects get the green light.
