In economic terms, the rise of China over the past few decades has been one of the most significant events to occur in our lifetime. The scale of the change is difficult to grasp. As recently as 60 years ago, the country was so underdeveloped it couldn't even feed itself. This resulted in one of the deadliest famines in human history. Yet a mere 60 years later it looks destined to become the largest economy in the world.
This rapid growth has driven the mining and commodity price boom of the last two decades.
In some ways, the rise of China is a return to normality. For most of human history, China was the world's largest economy, though it occasionally swapped places with India. However, by the middle of the 20th century, these glory days looked long past and likely never to return. (Almost how we view former ancient economic giants like Egypt and Mesopotamia.)
"The chances of a Chinese turnaround looked all but impossible."
The US and Europe had built their infrastructure over centuries, a feat China had to accomplish over decades and for a larger population. Unsurprisingly, raising over a billion people out of poverty requires massive amounts of resources. To further compound the resource issue was the fact China also became the world's factory over the same period.
The result is, although China makes up less than 20% of the global GDP, it accounts for a far larger share of the world's commodity consumption. This consumption, however, is not uniform. For example, crude oil consumption is only about 15% of the global total.
"However, for certain commodities such as iron, coal, copper, and aluminium, the country consumes almost as much as the rest of the world combined."
This state of affairs will not continue indefinitely...
And, though in some ways China's rise has been unprecedented, in other ways it is following a well-trodden path. We can, to some extent, extrapolate the likely changes by looking at other economies that have lifted themselves out of poverty. Japan, Taiwan and South Korea all experienced similar economic miracles decades earlier. They were the Asian tigers that preceded the Chinese dragon.
These earlier Tiger Economies also consumed the same high level of commodities at the start of their development phase. However, once they reached elevated per capita GDP levels, their consumption patterns started to shift. Base material consumption started to decline and now resemble levels seen in Europe and North America. On the other hand, the consumption of crude oil and certain food stuff such as meat rose.
A key determinant of this shift appears to be per capita income. Countries with wealthier populations tend to focus less on manufacturing and more on domestic consumption. In addition, large scale infrastructure spending does eventually slow down. Once you build an electrical grid or highway system, you can simply maintain them indefinitely.
Despite its rapid growth rate, China's per capita income remains rather low, about $17,000. By comparison, the Asian Tiger Economies are roughly three times wealthier on a per capita basis. Even at its current scorching growth rates, it will take over a decade for China to achieve such levels.
Therefore, it's reasonable to assume China's current skewed commodity consumption patterns are likely to persist.
There is, however, a complication. China instituted a one child policy in 1979, which limited the number of children that parents could have. Though these restrictions have recently been relaxed, and the demographic impact has already occurred. This could cause the shift away from base material consumption earlier than might be expected, given comparisons with other successfully "emerged" economies. The reason is quite simple: Why keep building resource intensive infrastructure and manufacturing capacity when your population and workforce is declining?
Who can take up the commodity consumption slack?
Whether it occurs this decade or the next, China will eventually shift its commodity consumption patterns. Who can possibly pick up the slack of lower demand by 1.5 billion people?
There are only two realistic possibilities: India and/or Africa.
In many ways India seems the natural successor to China. They have very similar population sizes and to a certain extent economic history. India just started its economic revival a decade or so later. It also has yet to share China's demographic concerns.
"The average age of the population is about 27 versus around 38 in China. By comparison, the average age in the US and Europe is 38 and 43 respectively. "
Another key difference is China's political system has allowed it to push infrastructure projects at far faster speeds and at much lower costs than is possible in a democratic India. As an example, China made 3-million people move to create the Three Gorges Dam. India often faces years of delays moving even a few dozen farmers to build a road.
This lack of government capacity, which results in poor infrastructure, has also meant that the country has been unable to develop a large manufacturing sector and relies far more on services.
Africa, while obviously not a unified country, even combining its populations is smaller than China. This is however likely to change in the future. The average age in Africa is just 19 years. By the 2030s, Africa will be adding more workers to the global labour force than the rest of the world combined.
It also shares many of the same drawbacks found in India, perhaps to an even greater extent. Africa is also historically an exporter of commodities rather than a consumer. But, if the nature of African consumption were to change, it is likely the commodity booms we've seen since the turn of the twentieth century can continue.
Viv Govender is a senior analyst at multi-award-winning brokerage Rand Swiss. If you're interested in finding out more about accessing commodity stocks and ETFs, you can apply for a Rand Swiss trading account here
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