China, a Global Economic Powerhouse
China's meteoric rise in the world makes it a country you cannot afford to ignore
Issue: Oct 2009
This month, China celebrates its 60th National Day. This comes at a period when China stands proud in the global arena. From the successful hosting of the 2008 Beijing Olympics, to the decisive RMB4 trillion (approximately US$585 billion) Chinese economic stimulus package which helped to stabilise global investor confidence, China has shown the leadership befitting of a nation that has been among the top two global superpowers for 18 out of the past 20 centuries.
Without a doubt, the Chinese growth story is an amazing one. In 1978, the idea of economic reform was mooted at the Third Plenary Session of the 11th Central Committee. The following year, the Central committee and state department earmarked Shenzhen, Zhuhai, Shantou and Xiamen as special economic zones. At the 12th National People's Congress in 1982, the Communist Party's leader Deng Xiaoping advocated the development of Chinese Socialism and the target of doubling China's GDP by the end of the 20th century was announced.
In 1984, the Central committee allowed 14 coastal cities to be opened completely to foreign investors and Deng reaffirmed the "open door policy" in 1986 to encourage foreign investment. In 1988, the constitution was amended to allow for the development of private enterprises and to legalise the sale of land.
In 1989, the Shanghai and Shenzhen stock exchanges were opened. A year later, Shanghai began developing the now famous Pudong business district. In 1992, Deng toured southern China to press for faster economic reforms and by 2001, China had become a part of the World Trade Organisation or WTO.
In the short 30 years since the start of its economic reforms, China has transformed into an economic powerhouse, with growth averaging at 10% per annum. GDP per capita shot up 16 times from USD190 in 1980 to USD3,180 in 2008; this remarkable growth has helped to lift a mind-boggling 235 million Chinese people out of poverty.
From a paltry 2% of global GDP in 1980, China now accounts for 11.5% of global GDP in Purchasing Power Parity terms, making it the world's second largest economy. According to a 2007 Goldman Sachs report, China is even expected to overtake the US as the largest economy in the world by 2027. Given the recent continued robust Chinese growth and the correspondingly anaemic growth prospects of the US, this 2027 timeline is now likely to be brought forward substantially.
China has also become the factory of the world, and is now the second largest exporter globally, as compared to its ranking of 32 in 1980. As a testament to the competitiveness of Chinese manufactured products, we hear the phrase "Give me your China price" in business negotiations all over the world, a reference to the absolute lowest price possible.
China's resurgence in the economic sphere is also extending China's soft-power and influence. This could be seen by the hordes of students from the US to Europe and even Korea, eager to learn the Chinese language. Even investment guru Jim Rogers has a nanny to teach his daughter the Chinese language, as he believes the skill is important in guaranteeing success in the 21st century.
Limited impact from global crisis
Although the global financial crisis proved to be a speed bump, China's decisive benchmark interest rate cuts and its economic stimulus package were able to help its growth recover strongly. China's economy expanded by 6.1% in 1Q09 and 7.9% in 2Q09 (year on year basis). Overall GDP growth in 2009 is expected to hit the government's target of above 8%. This is a spectacular achievement, given that the developed economies of the US, Europe and Japan are expected to contract by 2.6%, 3.9% and 5.7% respectively this year.
Boosted by the RMB4 trillion stimulus package, retail sales growth in China bottomed out in February 2009 and has been registering growth rates of approximately 15% year on year in recent months, a level comparable to the earlier pre-crisis period in 2007.
The expansion in bank lending has also caused a surge in fixed asset investment, which in turn has offset the negative contribution of net exports to GDP growth. Things are once again looking good for the property sector as loan growth and an increase in consumer confidence has heightened transaction activity in the property sector.
Supportive monetary policy
To cushion the impact of the global financial crisis, the central bank (People's Bank of China) aggressively cut benchmark rates. Credit expansion has been massive. New loan growth is expected to reach RMB10 trillion (or approximately USD1.4 trillion) this year while M2 money supply growth is likely to be around 30% on a year on year basis this year.
The explosion of credit growth has brought along fears of resource misallocation, asset bubbles and the prospect of non-performing loans damaging the banking sector in future. Concerns over asset price bubbles in the stock and property markets are not undue, given the huge amount of liquidity available in the market, and rumours of potential credit withdrawal has unnerved investors and sent the stock markets on a rollercoaster ride.
However, in the near term, with inflation still benign, China is likely to maintain an appropriately loose monetary policy, supportive of growth. Nonetheless, to prevent asset bubbles from forming, the government has begun to tweak its monetary policy at the margins. For example, the central bank has issued longer-term central bank bills to soak up liquidity in the system while the China Banking Regulatory Commission has introduced other measures to prevent the misuse of bank loans and ensure that credit flows to actual projects rather than the asset markets.
Bright prospects in residential property market
Despite the risks of a slowdown in credit availability dampening spirits in the property market, the prospects for the residential property sector still remain good, based on four main factors.
The first is that household balance sheets in China are mainly under leveraged and cash rich. Affordability still remains 8% higher than 2007, even though prices have recovered by around 26% in first-tier cities.
The second factor is the decline in inventory levels in 12 major Chinese cities, from their peak of 20 months in January 2009 to 11 months this August. A fresh supply is also limited as new units are unlikely to be released until late 2010.
The next major factor is the Chinese government's preference for economic stability through its policies, and this is likely to prevent excessive price volatility in the property sector.
The fourth factor is the key role that a booming property sector would play in China's growth as property construction accounts for 25% of total fixed asset investment. Furthermore, local governments depend heavily on land sales for revenue to fund its infrastructure developments as part of the nation's RMB4 trillion fiscal package. With local infrastructure spending accounting for around 34% of the fiscal package, overtightening of the property market may tame recovery.
Reclaiming its place in the sun
Having been a global superpower for most of the past 20 centuries, China's re-emergence should come as no surprise to any economic historian. With GDP growth expected to continue growing at a blistering pace, and with domestic consumption only accounting for a paltry 35% of GDP as compared to the 70% of the US, the peaceful rise of China would represent one of the greatest economic opportunities of the 21st century.
Contributed by Andre Lim and Serene Lim of the CapitaLand Economics Unit