CHINA'S ECONOMIC GROWTH

China will have to rethink its growth strategy if is to be able to sustain economic growth.
AP

STUNG by the global economic crisis, China is searching for a more stable growth model. Vice-president and portfolio manager Jing Ning is responsible for covering Chinese equities and building BlackRock's Chinese equity products and research capability. She offers some thoughts as to the future investment opportunities in China.

China's economy has enjoyed explosive growth over the past two decades. Its stock markets have rallied along with this growth, delivering huge returns to foreign and domestic investors alike, with the MSCI China growing over 420 per cent since January 2003.

The foundations of this growth lay in the confluence of several crucial factors; an enormous pool of cheap labour, an inexpensive currency, a massive Western appetite for consumption and the availability of easy credit. At this point, when China's cost advantages are dissipating, its currency is under pressure to appreciate, Westerners have rediscovered the value of thrift and the credit binge has so spectacularly collapsed, a discerning investor may well ask if China's economic boom, and the opportunities it offered, have come to an end.

China at a cross-roads

The events of the past year have illustrated that China needs a more stable growth model. Its export market has been badly hit and only an unprecedented injection of 4 trillion yuan ($828 billion) has sustained its economic growth. China's pockets, although deep, are not infinite. A new driving force is needed if the economy is to grow.

The good news is that the next catalyst for growth may already be emerging. Two forces - domestic consumption and higher productivity - combined have the ability to be every bit as powerful as the export-driven model before it.

The rise of the middle class

China's workers are aspiring to middle-class comforts and increasingly have the means to gain them. Over the next 15 years, it is estimated that the proportion of the Chinese population with incomes over US$3,000 ($4,238) pa will rise from less than 20 to almost 80 per cent. This dollar figure is crucial - evidence suggests that above US$3,500 pa spending on the discretionary comforts of middle-class life - a washing machine, an air conditioner, a small car - really takes off. Significantly, this rate of growth is predicted to be faster than that of Brazil, Russia or India, its "Bric" peers.

Moving up the value chain

Research and development budgets in China have doubled between 1996 and 2005. The establishment of high quality medical research centres in China in recent years shows increasing sophistication. China's government has recognised that an emerging market can easily replicate a low-cost export model. It has the ability to build some intellectual capital and move into more sophisticated areas. This is harder to replicate and ultimately leads to more stable growth.

As always, reward is accompanied by risk and China's move to continued growth with more stability must be careful and controlled.

A delicate balancing act

In the short-term, the government is attempting a delicate balancing act. It aims to achieve annual economic growth near 8 per cent to absorb 20 million new workers each year and maintain social stability. It has only maintained this rate in the past three quarters via a flood of cheap credit.

However, much of this credit is funding speculation in stocks and property, raising the possibility of short-term assets bubbles. Economic overheating is also a concern as inflationary pressures build. The government is wary of both and has begun to "talk down" the market in recent weeks with some signs of success.

The demographic sweet spot ends

China needs to contend with an ageing population and the burden it places on those working. The government's major challenge is to establish adequate social security systems over the next 30 years to ensure that an aging population is cared for without stymieing growth.

The next Big Thing

The government's commitment to this new growth path can been seen in the 4 trillion yuan stimulus package that pulled China through the global recession. While the spending on rail, housing, roads and other hard infrastructure was well publicised, the soft elements attracted fewer headlines. These elements, such as investment in medical, education, ecology, technical innovation and regulation yield less now, but are arguably more important to sustainable growth in the long-run. The inclusion of these in the package demonstrates that, even as China's government was scrambling to avert a short-term crisis, it still had one eye fixed on the new path for China's growth.

We believe that the combination of consumption and productivity can be every bit as powerful as the export-led boom of the past three decades. Domestic consumption only contributed 35 per cent to GDP last year - the potential for expansion is huge. Where the investment opportunities in the past few decades were in exporting manufacturers, going forward it could be the high-end clothing, the domestic automobile and the private education sectors which deliver huge gains. The technology and healthcare sectors are still in the early stages of infancy - the gains in these sectors still lie in the future.

From TODAY, Business – Thursday, 17-Sep-2009


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