When it comes to emerging markets, China is the 800-pound gorilla - or this case, dragon - in the room. The nation's huge population, growing middle class and blistering growth are hallmarks of the emerging-markets thesis. China has undergone one of the most dramatic economic changes of any country in the world and has shifted away from pure communism to more of a centrally controlled capitalist market. Policies to build infrastructure and reforms designed to spur its huge domestic market seem to be working.
This surging interest, however, is not without concern. High inflationary pressures, property bubbles and Europe's debt/economic woes have certainly placed a damper on China's perma-bull thesis. Over the last year or so, China's stock market and various tracking funds spent much of their time in the proverbial basement. Many analysts and pundits have started to question just how strong the Chinese growth story will be over the next decade.
Yet, despite various fears, China's economy has plenty of long-term fight left in it. For investors, the emerging market giant offers one of the best bets on developing world growth.
Still a Growth Engine
While China has faced some recent stumbling blocks, the long-term prognosis for the country is still good. That's because any short-term pain will be outweighed in the long run, thanks to various structural changes and policies created as part of the country's current Five-Year Plan.
A key part of that plan is to become more dependent on domestic consumption. Already, Chinese domestic consumption has expanded at an average rate of 15% between 2001 and 2010, and that number continues to grow as new policies targeting everything from consumer lending to the purchasing of modern appliances have been enacted by Beijing. Rapid urbanization is the name of the game for China as its residents now crave more modern and Western conveniences.
In the first three fiscal quarters of 2012, China's domestic consumption became the largest contributor to its GDP growth after falling behind for the past decade. Overall, domestic consumption made up roughly 55% of China's GDP.
Reducing Exports and Increasing Imports
Along with direct stimulus measures designed to boost consumer spending, China is working hard to reduce its exports and double imports by 2015 - with the goal of reducing its trade surplus to zero by 2015. This will help to release the country from the binds of an export-reliant economy. This plus rising wages across its 1.3 billion residents and China's domestic consumer growth is assured to be exponential in nature.
Then there is the nation's infrastructure spending to consider. By improving its economic backbone, China will be able to compete on the international stage. Much of China's $586 billion stimulus package enacted during the credit crisis was spent on highways, railroads and airports. Since that time, the country has continued beefing up these vital transportation networks while also boosting renewable and traditional energy infrastructure, communications networks and water pipeways. All in all, this spending will ultimately help China's people prosper and drive that all important domestic demand.
Finally, there is China's fiscal health to consider. While there are some analyst concerns about the size of China's current debts, the key takeaway is that the nation also holds almost $3 trillion in currency reserves, investments and gold; this buys Beijing a lot of wiggle room in case of an issue. Average Chinese citizens are pretty "well-off" versus their developed market rivals in the savings and debt department. The average Chinese citizen saves roughly 36% of his or her income, while credit card debt is almost non-existent. And despite China's red-hot housing market, the average Chinese home has only seen modest price appreciation and most mortgages require about 30% down to qualify.
The Bottom Line
When investors first look to emerging markets, China tends to be at the top of their lists and there is good reason for that. The nation's huge population, growing middle class and blistering growth make it one of the most attractive places to invest for the long term. While there have been some setbacks in recent years, the long-term picture for the nation remains good. Those investors without a China strategy or fund in their portfolio should consider adding a stake in Asia's roaring dragon.