|
Published: November 19, 2009
A year ago, nobody thought China could
manage 8 percent GDP growth in 2009. With year-to-date growth
coming in at 7.7 percent through the first three quarters and
getting stronger, China is poised to break that 8 percent mark
rather easily.
The success of the Chinese government’s stimulus efforts,
evidenced by the lofty economic numbers China has managed to
produce amidst a global crisis, has led many to claim China is
the next great bubble.
We see five reasons China is not a bubble and believe that its
prospects remain strong the next decade or two.
1) Consumption Continues to be Strong
China is transitioning to a consumption-based workforce. Retail
sales rose +16.2 percent in nominal terms during October and
have been accelerating. The retail sales figure isn’t a perfect
proxy, but it is the best available indicator of overall
consumption because it includes sales to consumers and not just
purchases made by the government.
We also saw strong growth in industrial production (IP) and
power generation -- both were up more than 16 percent on a
year-over-year basis in October. Housing starts were up more
than 50 percent (year over year) for the second straight month.
2) Structural Changes to Domestic Economy
We’re seeing a transition to a service-related economy. The
service industry is the fastest-growing sector (roughly 20
percent faster than construction) and now accounts for one-third
of China’s workforce.
|
 |
In general, the size of the service sector
is directly correlated to the amount of goods and services an
economy consumes. This is why the government has spent such a
large amount of the stimulus on areas that benefit the domestic
market -- that’s where it thinks the economy is headed.
3) Stimulus Exit Strategy in Place
China’s stimulus exit strategy is simple -- create a strong
economic base that the private sector can launch from. After
private investment surpassed that of state-owned enterprises in
September, the two flip-flopped during October.
Given the environment, month-to-month fluctuations like this are
to be expected since private investment is dependent on how
willing Chinese citizens are to put their own money at risk.
Even though Beijing is determined to wean China’s economy off of
government stimulus, the government will not hesitate to ramp up
activity should the private investors become risk-averse.
4) Government Controls on Flow of Money
After lending more money over the first five months of 2009 than
all of 2008, we’ve seen loan numbers come down. There’s a
longstanding pattern of new loans slowing down during the second
part of the year, as banks have historically rushed to meet
government-mandated loan quotas.
The magnitude this year’s slowdown -- trillions of yuan -- is
evidence of Beijing’s dedication to prevent a bubble from
forming. Once the figures grew too large, the government moved
quickly to hit the brakes.
While U.S. regulators have many holes to plug in order to keep
the economy afloat, the limited number of investment options
available to Chinese citizens -- basically stocks, bank savings
and property -- makes it easier for the government to institute
controls.
This is what happened in 2007 when the government forced a
slowdown in the housing market before it overheated. After its
economy grew 12.6 percent in the second quarter of 2007, China
took more aggressive actions to cool its economic growth. The
government raised lending rates and also raised reserve
requirements to shrink the pool of money available for lending.
5) China’s Long-Term Goals Match Up With Short-Term Goals
In the United States, the Federal Reserve and policymakers are
faced with conflicting goals. They need people to spend in order
to get the economy rolling again, but their end game is to have
the American people spend less and save more.
It’s the opposite for China.
The problem in China is excess savings and not enough spending.
The short-term and long-term challenges are the same -- to get
people to spend more.
Recent signals that China will begin letting the yuan appreciate
against the US dollar are not new. For several years, Beijing
has stated a gradual appreciation of the yuan will benefit the
economy, and CLSA expects Beijing to resume a 5 to 7 percent
annualized appreciation process about midway through 2010.
Rapid economic growth may be common in emerging economies, but
there’s only one China. Already the world’s third-largest
economy on a nominal GDP basis and second-largest based on
purchasing power parity, the Chinese aren’t making a break from
the back of the pack -- they’re leading it.
Domestic consumption, the rise of the service sector and
increased private investment won’t make China immune to economic
bubbles, but these strengths will provide some protection from
external forces.
-- Romeo Dator
Contributor
Daily
Reckoning
Editor's Note: This
article originally appeared in
Daily Reckoning. |
