Growth Dragon Report - April 2023
The April report is now available, and you can choose to download the PDF version at the end of this post or conveniently read it on Substack.
Report outline
China on the World Stage: Manufacturing moving out of China, India overtaking China, De-dollarization has began
China’s Economy: Indicators for GDP Growth, Retail Sales, Property Market and Exports
China’s Stock Market: index and sector performances roundup
Company Review: Alibaba, Tencent, Hikvision and Dahua
Investment Idea: A merger arbitrage opportunity
1. China on the World Stage
China's influence on the world stage is growing, and in this section, we will discuss the significant developments that occurred during the month.
Manufacturing moving out of China
Currently, the geopolitical tension is having a more significant impact on China than on the US. Many companies, especially those with manufacturing bases in China, are concerned about getting caught in the crossfire and are planning to relocate their factories and restructure their supply chains. As a result, countries such as India, Vietnam, and Mexico are expected to benefit from this shift. Apple is the most recent brand to make this transition, moving part of the iPhone production to India. India currently produces 5% of the global iPhone production, with a target of reaching 25%.
There may be concerns that China's status as the "factory of the world" is at risk and that the exodus of companies is bad for its economy. However, it is unlikely that all manufacturing will leave China, given the competency and efficiency the country has built up over decades. In fact, China's manufacturing capability has moved up the value chain, and it has the ability to produce items that other countries cannot. For example, Apple's new augmented reality (AR) device will be manufactured by Luxshare Precision, a company based in China. While some manufacturing may shift to other locations, it will likely be less sophisticated manufacturing, and China will continue to play an important role in global manufacturing.
In addition, China is a massive consumer market, and many brands will still want to manufacture a significant portion of their supply in China to sell to Chinese consumers. While factories outside of China may produce goods for the rest of the world, it would be financially unwise to abandon the Chinese market. Therefore, the relocation of factories from China may not have as significant an impact on China as some media outlets have suggested.
India overtaking China?
According to U.N. projections, India's population is expected to reach an estimated 1.4286 billion people in 2023, surpassing mainland China's population of 1.4257 billion, which would make India the most populous country in the world.
India not only has the potential to become the most populous country in the world, but it also boasts the largest young population aged between 15 and 24, with a staggering 254 million individuals. This youthful labor force could serve as a critical economic force, potentially driving growth and development for several decades to come.
On the other hand, China's population is rapidly aging, with over 12% of its citizens aged 65 and above, compared to India's 6%. Moreover, China's population recently experienced a decline in 2022 for the first time in over 60 years.
China's fertility rate is at a low of 1.28, while India's fertility rate is relatively higher at 2.05. As a result, the population of India is likely to surge ahead and widen the gap with China in the coming years.
A larger working-age population usually correlates with higher economic growth, highlighting India's potential in this regard. So is India going to supersede China soon?
Regrettably, there is a substantial economic disparity between India and China. In 1987, their GDPs were comparable, with India at $279 billion and China at $273 billion. However, by 2021, China's GDP had grown to $17.73 trillion, while India's had only reached $3.176 trillion.
What happened?
India's focus has been primarily on services, and the world has come to rely on it for IT outsourcing. In contrast, China has focused on manufacturing, which has led to faster economic growth and higher wages for its people. As a result, India now needs to catch up and develop its manufacturing sector. However, it will likely take decades for India to come close to China's level of manufacturing output and efficiency.
Meanwhile, China is on track to become the world's largest economy, possibly surpassing the US as early as 2030.
De-dollarization has began
In March 2023, the Chinese yuan overtook the US dollar to become the most traded currency in Russia. This shift occurred due to additional sanctions imposed this year, which impacted the few Russian banks that had the ability to conduct cross-border transfers using dollars and currencies of nations classified as "unfriendly" by the Kremlin.
The Finance Ministry of Russia converted its market operations from the US dollar to the yuan and established a new structure for the national wealth fund, with 60% of its assets held in yuan. The Bank of Russia has also been urging companies and citizens to move their assets into the ruble or "friendly" currencies to mitigate the risk of having them blocked or frozen.
As the saying goes, "the enemy of my enemy is my friend." China could cultivate closer relationships with the adversaries of the US, and present yuan as an alternative to the US dollar's dominance. This could lead to more countries using the yuan as a means to evade US sanctions.
In addition to Russia, former Brazilian President Luiz Inacio Lula da Silva has urged BRICS nations to create an alternative to the US dollar in foreign trade. Recently, China and Brazil have taken measures to facilitate the settlement of their trade transactions in yuan or reais, in an effort to reduce costs by eliminating the need for a third currency (USD) in their transactions.
While it may be too early to declare the end of the US dollar's dominance, it is clear that the yuan's increasing use in global trade will pose a challenge to the dollar's status. The yuan's adoption is likely to increase as China's economic power grows and surpasses that of the US. However, there are still limitations to the widespread use of the yuan due to China's capital account controls.