China's Future Economy – Part One

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In a recent article, we covered Premier Wen Jiabao’s annual report to the National People’s Congress this week containing this headline-grabbing statement: that Beijing has set a minimum growth target for 2012 of 7.5 percent. If growth does come in at an average of only 7.5 percent (meaning it has the scope to drop to 6.5 percent for a few months this year), it will be the slowest pace in 22 years.

As the New York Times states, at its peak in 2007, China’s economy grew at an annual pace of 14.2 percent. As recently as 2010, it was 10.4 percent. Now, though, the government is trying to guide the economy toward a minimum average annual growth of 7 percent through 2015. Is this a reflection of the poor state of the global economy, or is there more at play here?

The paper believes slower growth partly reflects a government attempt to shift the economy more toward personal consumption, with less emphasis on exports and investment in big domestic construction and infrastructure projects. An article this month by the Economist takes the same view, reporting on a joint study undertaken by the World Bank and the Development Research Centre, a prominent Chinese government think tank, called “China 2030.” The study identifies half a dozen serious flaws in the Chinese economy that will need fixing if the country is to reach its potential over coming decades.

Source: The Economist

The report projects a gentle slowdown of growth, which will average 7 percent in the second half of this decade and 5 percent from 2026-30. That would be enough to make China the world’s biggest economy and a high-income country, by the bank’s definition, with an income per head of about $16,000. But to achieve this, China will need to undertake a number of reforms, many of them profound, if it is achieve slower but more sustainable economic expansion.

It’s generally accepted that for a number of reasons, China’s model of export-led growth and massive capital investment in housing, infrastructure and manufacturing cannot continue as it has.

To meet the aspirations of the population, salaries are supposed to keep rising — the urban minimum wage, for example, by 13 percent a year under Beijing’s current five-year plan. That alone will price many export industries out of world markets, but will not be enough to allow lower wage earners to buy property when a 1,000-square-foot apartment in central Guangzhou costs about $300,000 — nearly 50 times the starting salary of a new college graduate in computer engineering.

The government is trying to engineer a slow decline in property prices without creating a crash. Prices have dropped some 20 percent in Guangzhou over the last year, but they still have a long way to go. Meanwhile, the government’s sharp increase in low-cost housing is attracting considerable cynicism as to whether political connections will be required to buy such apartments.

Check back in for Part Two to see how China’s environmental issues will affect metals prices.

*What are the best practices for sourcing your company’s commodity needs in light of China’s economic announcements? Register to attend our conference (coming up soon — March 19 and 20!) Details below:

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