China's Future Economy – Part Two

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Continued from Part One

Think About the Environment

The “China 2030” report bestows considerable attention upon the environment, following years of environmental disasters and the slow, rather piecemeal pace of reform and application. Local officials are frequently blamed as being as much part of the problem as they are the cure in monitoring local polluters; but reform, while desperately needed, will raise manufacturers’ costs, further eroding the country’s global competitiveness.

Encouragingly, the report highlights the need for Beijing to rein in the state’s role in the economy, particularly the role played by state-owned corporations. In spite of blatant favoritism ensuring state entities get the lowest-interest-rate loans, first dibs on land and on resources, they transfer just 15 percent or less of their profits to the national budget. The Economist observes that if they increased the figure to 50 percent — a rate more in line with rich countries — it would increase budgetary revenues by 3 percent of GDP.

Naturally, state enterprises are said to be strongly against any such changes.

Das Capital Investment

Investment is another challenge facing China going forward. Local and regional governments are incentivized to achieve growth, so they encourage huge capital investment by giving away cheap land, underpriced electricity and low taxes to bring factories into their region or encourage expansion of existing works.

Source: The Economist

This capital-intensive growth has taken a huge toll on the environment, the Economist says, with the depletion of natural resources combined with damage to health from water and air pollution costing China the equivalent of 9 percent of national income in 2008.

The “China 2030” report is not a government policy document, but it has been produced with the close cooperation of the central bank and the DRC, which advises the cabinet. So it is probably safe to assume the report will be given serious consideration in the corridors of power, and while the new regime due to be ushered in later this year will probably be cautious about introducing any momentous changes for a while, much of what is in the report covers issues that are not optional in terms of needing to be addressed.

So assuming part or all of the report is implemented, what kind of China will we see going forward?

Well, we can see from Premier Wen’s address that slower growth is official policy — we can take it that greater environmental controls will also be applied. Infrastructure, as in road, rail and air travel investment, water treatment and power will all need to continue, but they will have to make room for greater emphasis on public services (hospitals, schools and public transport), and they will have to compete for funds with rising social costs.

In the short term at least, constraints on finance due to inflation will limit capital investments, but Beijing has already taken steps to encourage production for consumption over production for export, and we can expect that to gather pace. Iron ore, coal, non-ferrous metal ores and refined metal imports will rise more slowly, and where mining investments have been made on the basis of continued double-digit growth, global oversupply may result.

As the second-largest economy in the world, GDP growth at 7 percent — even 5 percent — will ensure China as the main driver in metals demand, but more sustainable and more consumer-led growth will result in much less of that GDP increase directly driving metals demand and prices.

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