China: The march from world's most populous to largest economy

China is one of the oldest civilisations-and in any case, the most continuous one-in the world with history dating thousands of years. Its inventions include paper, printing, gunpowder and even football. And it has its share of  great thinkers including Art of War's Sun Tzu,Confucianism-behind the religion practised in Japan and Korea.

It was ruled by various dynasties the most famous being Qin (from which it derives its name), the Ming dynasty which established modern China entity and the last one being Qing dynasty which collapsed in 1912...

The next 37 years were spent in one form of war either Civil war or externally against the Japanese until Mao Zedong took control in 1949.

In retrospect, Mao's peak came in 1949. The next 27 years under his rule(using the Red Book) were spent in a politics experiment Lab. One month you'd be flavour of the month, the next you'd be denounced by somebody and be heading for execution. One minute, there was freedom to air thoughts (100 Flowers Campaign), the next minute those quick to open their mouths were forced (literally in some cases) to eat their words. Two experiments are remembered not too fondly. The Great Leap Forward(to induce industrialisation) and the Cultural Revolution (a purge of the bourgeoisie a period so bad that children denounced their parents and classmates their colleagues). 

Upon his death in 1976, China was politically exhausted (I know the feeling). Deng Xiapong and the Communist Party decided to get real and inaugurated what they call "Socialism with Chinese characteristics", I call it communist capitalism. Is successive steps there was:

1. Relaxation of the agriculture collectives so that farmers could sell their surplus produce
   
2. Then onto town and village enterprises basically allowing towns and villages to set up and run industries
3. Strong saving and capital accumulation culture (approaching 50%of GDP according to OECD
4. Controlled open door policy to allow foreign enterprises into China
5. Removal of price controls in 80s
6. Setting up of banking and capital markets in the 90s and consequent controlled entry of foreign bankers
7. Reduction of NPLs in state enterprises
8. Encouraging private  enterprise by relaxing property ownership laws

These changes have however had as their foundation, strict adherence to communist ethos, such as listening and responding to issues that pose a threat to its reign (in China, inequality as an issue is being actively tackled); executing the corrupt; maintaining strong oversight on the stock market, exchange rates, interest rates and general economic growth balance to ensure some parts of the population/country are not left behind. And depoliticised the economy.

And the results are impressive. China has averaged 9.5% growth pa since the early 80s and shows no signs of slowing having already recorded that average annual growth in the first half of 2007.

Today, China alongside the US are the two great anchors of the world economy. Most excitingly, according to the Economist China's economy has very few issues that could slow down the 10%+ growth in its economy for the foreseeable future.



Stockmarket comment:
China has 3 stock exchanges (if you include Hong Kong), Shanghai and Shenzhen all having one thing in common. They are powering forward to the extent that the govt there has tried to intervene verbally,introducing capital gains and transaction taxes and interest rates all to no avail. Historic and forward P/Es are now looking very ripe. However, current economic projections are supportive of projected company growth. More importantly no market today has the potential that China has.

Investors should have 20% exposure to China in their investment portfolio either indirectly (through unit trusts-for Diaspora, there is an array of these, if in Kenya, try EMAC or directly (some of the companies are now listed in US and UK).