China's development has reshaped the global economic landscape, and created a middle-class which is able and willing to consume. The lasting impact of this is yet to be felt, but there is clearly a transfer of capital and ideas to China on a scale rarely witnessed in the past. The scale and speed of China's economic transformation since 1978 has been astounding for all who have observed it. Hundreds of millions of people have been lifted from subsistence and the country has emerged from being an economic irrelevance to the economic engine room of Asia. China's voracious appetite for hard and soft commodities has changed the flows of global seaborne trade.
Then Premier Deng Xiaoping's decision in 1978 to pursue polices of mass-industrialisation has been the key to China's success. India has specialised rather than industrialised and the result is stark. From level pegging in 1981, China's economy has grown to twice the size of India's. This process has come with a willingness on the part of the Chinese authorities to take extraordinarily tough decisions. In the mid 1990s tens of thousands of loss-making factories which the state could no longer afford to support were closed and millions were put out of work. The covenant of the so-called 'iron rice bowl' between citizen and state was broken, and elements of private competition were introduced to economic life.
Housing reform in 1998 introduced private home ownership in the cities and entry into the World Trade Organization ushered in legal and administrative reforms and the dismantling of trade tariffs for many imported goods. In recent years the Government has tackled the banking sector which was previously merely a distribution arm for state funds. The banks were restructured, put onto a more commercial footing and were partially privatized.
These reforms coupled with significant investment in infrastructure have created conditions in which economic growth has sustained. The result has been increased household incomes and an increase in private spending. This is now being reflected in tangible benefits for the Chinese people. For example, in 2010 China overtook the US in become the world's largest car market. Private home ownership and increasing urbanisation has provided extra impetus for household spending.
Underpinning the investment case for China is our belief that rising incomes and a spreading of wealth will lead to the creation of a middle-class consumer market which has the potential to be equivalent to the US or Europe within the next ten years. This will provide a new and arguably more sustainable growth driver than the direct investment spending of the past thirty years.
Improving household income in China creates demand for goods and services from across Asia, and positions China as the key global buyer in a range of commodities. China is approaching a tipping point where history suggests that consumption can accelerate. The development of a consumer culture in China is a tangible long-run trend which will create new opportunities for investors.