China Overtakes the US as the World’s Largest Economy
Madhav Trivedi
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The size of China's economy is expected to surpass that of the U.S. until?2025 , rather than?2027 as predicted a year ago by the Japan Center for Economic Research, whose latest forecast says Beijing is damaging the country's growth potential by clamping down on?its tech and other big industries.
The report, issued on Wednesday, also cites China's ongoing decarbonization drive as well as some big debt burdens, one of which has the Evergrande real estate empire teetering, as drags on growth.
It says South Koreans in 2023 will overtake the Japanese in one measure of individual wealth and the Taiwanese will do so a year later as delayed digitization in the government and other sectors hampers Japanese productivity.
The JCER estimated the economic growth of 18 Asia-Pacific economies through 2035. It also analyzed per capita GDP, a gauge for individual wealth, for those?economies.
It forecasts that China's nominal gross domestic product will overtake that of the U.S. in 2025.
Last year, the JCER projected this economic eclipse to take place in 2028?if the COVID-19 pandemic were to become a more serious menace or in 2029 if the pandemic were to follow a standard scenario.
The center's latest forecast is for a four- to five-year delay before China becomes the No. 1 economy.
Since first coming to power in 2012, Xi Jinping has preached economic reform as the way to achieve “the Chinese Dream.” Some of the reform measures have been aimed at deepening China’s?financial markets ?and giving stock markets a greater role in financing corporate investment. Believed home to the deepest economic and financial market demands in the world, the U.S. may have just the blueprints for the category of the?stock market ?development the Chinese government administration state rule is looking to foster. Below is an overview of both the U.S. and Chinese stock markets with highlights of some of the unique differences.
KEY TAKEAWAYS
The Beginnings
China’s stock markets are relatively young compared to the U.S. markets. While the?Shanghai Stock Exchange?(SSE) dates back to the 1860s, it only reopened in 1990 after being closed in 1949 when the Communists took power. The?Shenzhen Stock Exchange?(SZSE) also opened that exact same year.
While the?Hong Kong Stock Exchange ?(HKG) was founded in 1891 (and Hong Kong operates as a politically autonomous region from mainland China), it first began listing the largest Chinese?state-owned enterprises ?in the mid-1990s.
By comparison, the U.S. stock market is more than two centuries old, with the?New York Stock Exchange ?(NYSE) evolving from the signing of the?Buttonwood Agreement ?on Wall Street in 1792.1?It went through several iterations before emerging in 1863 under its current name, the New York Stock Exchange (NYSE) 2
China Market Emerges when the globe faced COVID-19 Recession in 2020
Since that time, a number of other stock exchanges have risen up in the U.S. The?Securities and Exchange Commission ?(SEC) lists and documents a total of 28 registered national securities exchanges, the second most important exchange after the NYSE being the?Nasdaq , established in 1871.
South Korea introduced a national identification system in the 1960s that now allows residents to make about 1,300 types of applications and procedures by typing their ID numbers into a government portal.
The numbers can also be used to take out internet service subscriptions, open bank accounts and make other private sector transactions. When the government provided cash as part of its COVID-19 response, more than 90% of all residents received the payouts within a month.
Taiwan is accelerating its digital transformation under the leadership of Digital Minister Audrey Tang . The government portal permits citizens to register and file applications at each stage of life, from birth to retirement to death. The site also accepts corporate registrations.
Applying for cash payouts or allowances online is said to enable recipients to receive money three to five days earlier than if they were to apply in person, which motivates people to go digital.
In contrast, business transactions in Japan remain largely analogous. A comparative study of Japan, the U.S. and Germany conducted this year by the internal affairs ministry shows that 25% of Japanese companies'?hanko?stamps and signatures on contracts and other documents given to business partners are "not digitized at all." Among U.S. firms, 25% said these processes have been "fully digitized," the survey shows.
Japan has also been slow to digitize monetary transactions, which account for a large portion of corporate clerical work. Around 10% of companies pay taxes and other public expenses electronically. Most businesses still send employees to banks to make payments.
In its report, the JCER sounds a warning: The Japanese economy could fall into chronic negative growth in the 2030s unless it accelerates its digital transformation.
The Stock Exchanges
The U.S.
NYSE
NASDAQ
China
Shanghai Stock Exchange
Shenzhen Stock Exchange
Hong Kong Stock Exchange
Role in the Economy
Last year, due to multiple temporary reasons, the increment of the nominal GDP of the US was slightly larger than China's. Previously, there were always unfavourable factors for China's economy every year, but not only China's GDP growth rate exceeded that of the US but also its actual increment is bigger than the US and that has lasted for quite some years. Therefore, China's GDP growth rate of 3 percent was higher than the US' 2.1 percent last year, but the increment of the US GDP slightly surpassed China's. This is worth paying attention to.
Despite being some of the largest exchanges in the world, China’s stock markets are still relatively young and do not play as prominent a role in the Chinese economy as America does in the U.S. economy.
Further, whereas U.S. companies are heavily dependent on?equity financing , in China only a small percentage, often quoted as around 5%, of total corporate financing, is funded by equity. Chinese corporations rely much more heavily on bank loans and?retained earnings .
With regard to investors, equities are a large part of household wealth in the U.S., with around 52 % of the population owning stocks. In China, property,?wealth management ?products, and?bank deposits ?make up a greater proportion of their investments with only about 7% of Chinese owning stocks.
Stock markets evidently play a much larger role in the U.S. economy than the Chinese economy at both the individual investor and firm levels. While this means that China’s economy remains relatively protected from disruptive ups and downs in the stock market, it also means that companies remain limited in financing opportunities, a factor that can inhibit overall?economic growth .
Tool for Economic Growth?
China has surpassed the United States to become the richest nation in the world as global wealth tripled over the past two decades, according to a new report by the research arm of consultants McKinsey & Co.
The report has been prepared after examining the national balance sheets of 10 countries, representing more than 60 percent of world income. In an interview with Bloomberg TV, Jan Mischke, a partner at the McKinsey Global Institute in Zurich, said, “We are now wealthier than we have ever been.”
Whereas the U.S. economy plays an important role in raising investment funding for its corporations, China’s stock market has often been likened to a casino, dominated by unsophisticated?retail investors ?gambling their wealth rather than looking for long-term sound investments.
Some studies indicate that increasing the proportion of professional and?institutional investors ?relative to ordinary retail investors helps to improve the quality and efficiency of stock markets. This seems to make sense as professional investors are much more adept at analyzing fundamental values instead of being motivated by fear and?irrational exuberance .
While the proportion of U.S. equities managed by institutional investors stood at 62% in 2019, 99.6% of total investors in China’s stock markets were retail investors .
The unsophisticated nature of the majority of Chinese investors has been one reason that China’s stock markets have been likened to a crazy casino rather than a tool for economic growth. As China is looking to expand the depth and role of its stock markets it is going to need to change this perception in order to instill greater confidence from more professional types of investors, especially if it wishes to open its?capital account ?to attract foreign investors.
Openness to Foreign Investment
Unlike the U.S. and every other major stock market in the world, the Chinese markets are almost entirely off-limits to foreign investors. Despite easing?capital controls ?allowing a limited number of foreign investors to trade on the Shanghai and Shenzhen exchanges, only 5.4% of shares are foreign-owned.
China’s stock shares are divided into three separate categories: A shares, B shares, and H shares. A Shares are primarily traded amongst domestic investors on the Shanghai and Shenzhen exchanges, although Qualified?Foreign Institutional Investors ?(QFII) are also allowed to participate by special permission. B shares are primarily traded by foreign investors in both markets but are also open to domestic investors with foreign currency accounts. H shares are permitted to be traded by domestic and foreign investors alike and are listed on the Hong Kong exchange .
Even though China's stock markets are becoming open to?foreign investments , international investors remain wary of jumping in.
The Bottom Line
Despite having extremely large total?market capitalizations ?by international standards, China’s stock markets are still quite young and play a less significant role than they do in the United States. As?equity financing ?can be a significant factor for economic growth, China has much to gain from fostering further development of its markets. Giving greater access to foreign investors is a step towards deepening its financial markets, but the main hurdle will be overcoming investors’ lack of confidence.?
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Related Terms
B-shares are equity share investments in companies based in China. They trade in foreign currency on two different Chinese exchanges, either U.S. dollars or Hong Kong dollars.?more
The SSE Composite is a market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange.?more
A red-chip company is one that is based in Mainland China but incorporated internationally and listed on the Hong Kong Stock Exchange.?more
H-shares belong to companies from the Chinese mainland that are listed on the Hong Kong Stock Exchange or other foreign exchanges,?more
China A-shares are shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange.?more
The Shenzhen Stock Exchange (SZSE) is one of two main stock exchanges in mainland China and the world’s eighth-largest stock exchange by market capitalization.
What Is Shenzhen Stock Exchange (SZSE)?
The Shenzhen Stock Exchange (SZSE) is one of two main stock exchanges operating independently in mainland China. The other exchange is the?Shanghai Stock Exchange ?(SSE). The Shenzhen Stock Exchange (SZSE) is a self-regulated legal entity under the supervision of the?China Securities Regulatory Commission ?(CSRC). The main functions of the Shenzhen Stock Exchange (SZSE) are to oversee securities trading, provide the facilities for securities trading, and devise operational rules.
KEY TAKEAWAYS
Understanding the Shenzhen Stock Exchange (SZSE)
The Shenzhen Stock Exchange (SZSE) was established on Dec. 1, 1990.
2?It is located in Shenzhen, a modern city in southeastern China. The skyscraper building where the Shenzhen Stock Exchange (SZSE) is located is in the Futian District. Its construction started in 2008 and finished in 2013. The building is 806?feet tall and has 49 floors.
The Shenzhen Stock Exchange (SZSE) is the world's eighth-largest stock exchange by?market capitalization , with a market capitalization of $3.90 trillion in July 2021. It has trading sessions four hours a day and five days a week, Monday through Friday from 9:15 a.m. to 11:30 a.m.?and 1 p.m.?to 3?p.m.3?Its products include?A-shares , B-shares, indices, mutual funds, fixed income products, and diversified derivative financial products. Many of the companies listed on the exchange are subsidiaries of companies over which the Chinese government maintains a high level of control.
In this time of intense angst about America’s greatness (or, as some argue, loss of it), weak economic growth, and perhaps waning U.S. influence in the world, here’s a perspective you won’t hear much: America’s economy will not be the world’s largest for much longer, and that’s something for Americans to be proud of.
The Shenzhen Stock Exchange (SZSE) supports China’s multi-tiered capital market system with three boards: the Main Board, the SME Board, and the ChiNext Market. The?SME ?Board was established in May 2004 to serve companies with well-defined businesses that are stable in profitability. Many of the enterprises on this board are manufacturing companies. As a result, the SME Board is considered?a barometer of the country’s manufacturing sector.
The ChiNext Market, based and established in October 2009, is open to companies of all sizes that meet the listing criteria, but it focuses on innovative growth companies and startups. These areas of innovation include technology, management, and business models.2
The Shenzhen Stock Exchange (SZSE) has signed a?memorandum of understanding
(MOU) with 50 major stock exchanges and financial institutions across the world. It is a member of the World Federation of Exchanges (WFE) and the Asian and Oceanian Stock Exchanges Federation (AOSEF), and an affiliate member of the?International Organization of Securities Commissions ?(IOSCO).2
The Shenzhen Stock Exchange Versus the Shanghai Stock Exchange
Smaller and emerging-sector companies trade on the Shenzhen Stock Exchange (SZSE), and individual investors make up the majority of investors on the exchange. Larger, state-owned companies, such as banks and energy firms, often trade on the Shanghai Stock Exchange (SSE), and the majority of investors who trade on this exchange are financial institutions, such as banks and pension funds. Both exchanges were launched in 1990 in an effort by the Chinese government to modernize the Chinese economy by opening it up to foreign investors.4
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Related Terms
The SSE Composite is a market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange.
China A-shares are shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
The Shanghai Stock Exchange is the largest stock exchange in mainland China, trading in stocks, funds, and bonds. Stocks are traded in A- and B-shares.
B-shares are equity share investments in companies based in China. They trade in foreign currency on two different Chinese exchanges, either U.S. dollars or Hong Kong dollars.
The Warsaw Stock Exchange is the largest stock exchange in Eastern Europe and is located in Warsaw, Poland.
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