Monday, 28 July 2014

Guest post: "Provincial diversification: a missing piece of the China investment jigsaw"

As Financial Orbit moves into its second year I promised some further content innovations.  One of these is the introduction of guest authors. 

Jing Liang grew up in Shanxi Province (Taiyuan City, northern China) but left China fifteen years ago to come to the UK to study and work in the financial sector, most recently at an international investment bank. This is the first posting in a proposed multi-part series from someone with real and direct insights into the building power, influence and potential challenges of the Chinese economy.

Part 1 – Provincial diversification: a missing piece of the China investment jigsaw by Jing Liang

‘A journey of a thousand miles begins with a single step’ – Lao Tzu

Because I grew up at the time when China was just opening up its economy, I was able to witness and be able to compare what it used to be and what it is now, and I truly appreciate the tremendous transformation the country has accomplished. There are, inevitably, some less than satisfactory developments and ongoing challenges. However, I still believe the achievement of the last 30-years is undeniably amazing. Even though I was born there, to me, China is still a subject of fascination. 

Prior to this year, the last time I visited China was in 2012.  I came back 2 years later and I was amazed by the transformation, especially in the lower tier regions. In addition, I left China feeling very hopeful.  There is still so much scope for growth and there are signs of lower tier regions seeking a more sustainable growth path. I listed the places I visited in the below table and added London for comparison.

China, to me, has many different characteristics that often directly contradict each other. Looking at headline aggregate GDP, China is ranked second in the world. However, if ranked by GDP per capita, China is only 84th. China has thousands of years of history, but in terms of a greater appreciation of a market economy, it only just turned 34.  

With a share of global trade, as shown below, greater than the US as well as being currently the world’s largest purchaser of many commodities like copper to aid its economic development, the Chinese economy has attracted a lot of attention.

However, some of the conclusions amongst commentators or analysts had already benchmarked China as a mature economic superpower which should be judged in a similar way to the US, Germany or the UK.  For example the growth of China’s informal shadow banking sector has received much attention but (as a proportion of GDP) it is not the largest in the world by any means:

Within China, these self-contradicting dynamics also exist. From the table above and charts below, the growth imbalance between the top tiers and lower tiers regions are immediately striking.


The charts above show that lower level GDP per capita is still the main characteristic of most provinces. The growth rates are really scattered on very different levels and they are not at all similar. And not all lower tier regions are enjoying the same growth rate either, e.g. Shanxi province only grew 5% in terms of GDP per capita in 2013 as a lower tier region, while Gui Zhou, another lower tier region is growing almost 19%. The difference can be caused by many reasons, e.g. economic structure, background and favorable government policies, etc. 

Nonetheless, the difference make me think that, when anyone comes to look at China as an investment destination, they must be aware of regional differences, which often are very huge. These huge regional differences are creating different growth potentials, for example, when examining property prices and hence the potential for property developers (see chart below).  

As can be clearly seen above, the price movement in the property market of 100 cities surveyed is very scattered.  Different exposures by different property developers will lead to a range of outcomes, which will provide opportunities for stock pickers in the sector. 

One clear theme when looking at the recent drivers of Chinese economic growth has been the importance of government investment often in infrastructure. However, instead of following the infrastructure focused growth model which was used by many top tier regions, I noticed signs during my visit this time that lower tiers regions have already started taking more organic growth route and focus on exploring more sustainable ways of development, e.g. using clean air and water as leverage to explore consumer segment opportunities.

There are lots of concerns on the reliability of the data, figures and accounting practices.  In such a vast country these issues have always been there, even in ancient China.  Back then, the local officials always tried to fool their emperors who were comfortably living in the capital Beijing. The history books tell us that the Qing dynasty emperor, Qianlong, chose to visit the local provincial states to find out truth himself and was certainly not fooled. I visited the Grand Canal (see below), which apparently he used to visit his empire and find out the truth. If he can do it in the ancient middle-kingdom, in the modern days, we are obviously much better equipped.

China is really a big and complex subject, simply because of its size, its diversity within itself and that it is in the middle of transition period. Therefore, I do believe, especially after this trip, to increase the knowledge of each individual province will really increase the likelihood of finding a picture that is more closely resemble the real one. With all the stated challenges that commentators focus, the picture might not be so bleak if the vast under-developed lower tier regions are closely examined.

So in conclusion:

The future growth of China will most likely depends on which route of growth path the lower tier areas take and how successful they will be;

Property bubbles are likely to be more regional, where the pool of demand is less diversified comparing to high tier regions.

Food safety and air quality issues have created business opportunities for lower tier regions

In part 2 I will discuss what I observed on the differences in the lower tier regions I visited and reasons why I believe they are the future of China’s growth story.


  1. Fantastic insights! Thank you Jing and Chris. To get the real deal from a native financial professional in English is very special. No foreigner could provide such intelligence on China.

    1. Thanks for the support Mark. I think you will enjoy parts 2,3 and potentially more which Jing is just finalising at the moment. Part 2 should be uploaded before the end of the week.

    2. Thank you Mark for your support, I do hope you find it useful and also hope you will find the 2nd and 3rd part useful too. Thank you again.