The following chart shows how China’s per capita gross domestic product growth has eclipsed that of the world’s biggest economy, the United States. The period runs from 1993, when the MSCI China Index starts, through 2020, the latest year for which World Bank has the GDP data available.
It’s not that the US did poorly. Its economy grew more rapidly than did the other leading markets. Nor was the US unusually slow by its own standards. At no point in American history — not in colonial times, not the railroad period and not its postwar glory days — has the US economy ever progressed anywhere near China’s recent rate. The story isn’t America’s decline, it’s China’s spectacular rise.
A humble beginning
Pressing each country’s 1992 production down to 100 helps in comparing trends thereafter. But indexing the results masks China’s original poverty. It’s hard to imagine how poor China had been only a generation ago. In 1993, China’s per-capita GDP, expressed in 2015 USS dollars, was $1100 just one sixth of Chile’s output. China never had its huge size going for it as an economic backwater, but neither, for a long time, was it a major player.
It’s no secret that the times are very different now. In 1993, China was far behind other countries in taking on America’s dominance; today it is America’s only serious challenger. Moreover, because of the two countries’ growth rates, China will surpass the US around 2030 as the world’s largest economy.
China’s economic success has outstripped nearly every projection. So one would expect that the country’s capital market, since reopening after a 41-year lockup in 1990 and measured by an MSCI stock index since 1993, would have gone straight up. A tenfold increase in national wealth should amount to a great opportunity, after all.
Profiting from growth?
Business fortunes in the U.S., for example. From 1993 through 2020, US GDP growth was 85%. Over the same period, the nation’s pre-tax corporate profits increased to $8.7 trillion from $2 trillion. Adjustment for inflation cuts the former number to $4.9 trillion, but that’s still a one-hundred forty-five percent increase in company profits — far outpacing the economy’s growth rate. For every dollar of GDP growth, American companies earned $1.70 of pretax profits.
The US stock market certainly did much better than that. For starters, publicly traded equities pay dividends, so even if their shares had changed hands at 2020 price/earnings ratios as they did back in 1993, the stock returns would still have outpaced those companies’ income growth. For one, the stock market’s price/earnings ratio didn’t stay flat; it rose, instead. Third, some companies pumped up their reported earnings by repurchasing their equity shares.
Considering how American companies took advantage of their country’s meager economic growth to bulk up their profits, and thus the price of their stocks, the sky would have appeared to be the limit for Chinese equities. Well, Wall Street strategists were selling that pitch by the late 1990s. I clearly remember a 1998 speech at a financial advisors’ conference, advising that they pay attention to China. Their clients could start with the shares of multinationals that did business in China and go on to invest directly in Chinese companies. He was given a standing ovation.
Bad advice. Chinese stocks have lagged those of the other major economies since Jan. 1, 1993, the period measured by MSCI’s index.
The result is worse than it initially looks. That nominal 1.5 per cent annualised return makes for a complete loss after inflation. Which is why the headline of this column is too generous. In real terms Chinese equities took not the road to nowhere: They took the path to somewhere distinctly warmer, losing 1.8 percentage points a year.
Two caveats
To be fair, tracking the performance of Chinese stocks is complicated. To index China’s stock market is a complicated business, with multiple rules limiting what foreigners can do. One provider’s effort to capture the overall Chinese marketplace might vary significantly from another’s. During that same timeframe, for example, the S&P/IFCI Chinese equity index added 4.73% per annum, 3 percentage points better than what was reported by MSCI.
That discrepancy, while disturbing to those who expect uniformity from research organizations, is immaterial for this column. It matters little if Chinese equities have lost money in real terms, as MSCI’s numbers suggest, or eked out a modest profit, as S&P/IFCI reported. The bottom line is that even as the country experienced its unprecedented economic boom, its stocks have flopped. It would have been better for investors to own US Treasury notes.
It is also important to point out that, following a disastrous first decade, which was initially defined by the 1997 Asian financial crisis and ultimately by the global 2000-02 stock-market slump, Chinese equities were well-behaved for almost 20 years. But more recently, they have faltered badly once more, rattled by President Xi Jinping’s harsh treatment of entrepreneurs and by issues with China’s gigantic and systemically important real estate sector. This, as it happens, aligns with MSCI’s figures: Chinese stocks have lost 30% of their value during the past year.
Looking forward
In short, the reality of Chinese equities has proved to be utterly at odds with reasonable expectations. Even those who argue against general economic progress translating into stock-market success might have made an exception for China, given the breadth of the country’s boom and its political stability. They would have been wrong if so. The question, of course, is why. That will be the topic of my next column.
