China’s New GrowthNew Growth
Model
Arthur Kroeber February 2013
China is still growin
1. GDP growth will average 7% in 201
2. Structural reforms are necessary fodeliver enough despite political op
3 Th h d i i l d hif i3. The growth driver is already shiftin
4 D d f i t t i i f t4. Demand for investment in infrastrustrong and will be a key swing facto
5. Financial liberalization is moving faaccount opening is constrained byaccount opening is constrained by
ng – but differently
12-20, down from 11% in 2002-11
or that level of growth; new leaders will position and debt constraints
f i ig from investment to consumption
t h i d l t i tillucture, housing and new plant is still or
aster than many realize, but capital financial repression elsewherefinancial repression elsewhere
2
1. Trend growth is slo
• At 20% of US per capita GDP
enjoy another decade of fast c
d l f J K d T imodel of Japan, Korea and Tai
P t ti l th i• Potential growth is now arou
the past decade, and volatilityp y
• Yet thanks to the high base eg
will continue to grow rapidly
owing, but still solid
P (at PPP), China still can still
catch-up growth on the
iiwan
d 7 8% d f 11% iund 7-8%, down from 11% in
y will risey
effect, China’s global impact g p
3
Catch-up growth still haas a long way to run…
4
…but the potential GDP growth rate is now lower…
5
…yet slower growth does not mmean China gets less important
6
The low volatility of 20001-07 will not return
7
2. Policy shifts from cyclical ma
• Government’s ability to smoot
d i i i d band investment is constrained b
ratios
• Achieving potential growth re
capital allocation:
o Financial liberalization (highe( g
o Competition (curtai
o Fiscal (improo Fiscal (impro
o Factor prices (energ
• New leaders will pursue reform• New leaders will pursue reform
incrementally
anagement to structural reform
th cycles by pumping up credit
b hi h i d d bby high investment and debt
quires reforms to improve
er return on investment))
il SOEs and local protectionism)
ove local govt incentives)ove local govt incentives)
gy, water, land)
m but cautiously andm, but cautiously and
8
The downturn in China was nnearly as severe as in 2008…
9
…yet the policy respoonse was much weaker
10
Politics does not explain whyy China was slow to stimulate
11
The real constraint: Debbt levels are now higher
12
Another constraint: Tight job markeet means more inflationary pressure
13
New leaders: cauChina’s ne
The Politburo Standing Committe
Protocol BirthProtocol
rankName
Birth
yearNew jo
1 Xi Jinping 1953 Presidp g
2 Li Keqiang 1955 Premie
3 Zh D ji 1946 NPC C3 Zhang Dejiang 1946 NPC C
4 Yu Zhengsheng 1945 CPPCC
5 Liu Yunshan 1947 Vice P
6 Wang Qishan 1948 Discip
7 Zhang Gaoli 1946 Execut
* Not yet official as government positions will be ann Not yet official as government positions will be ann
utious reformersew guardee of the 18th Central Committee
ob* Old job
ent Vice President
er Executive Vice Premier
Ch i Ch iChairman Chongqing
C Chairman Shanghai chief
resident Propaganda chief
pline chief Vice Premier
tive Vice Premier Tianjin chief
nounced in March 2013nounced in March 2013.
Xinhua, GK Dragonomics research
14
3. ‘Rebalancing’ to more cons
• After rising steadily from 199
ratio fell slightly in 2011 and 2
• By the end of the decade rea
th ld b l 3 5growth could be as low as 3-5
growing nearly double thatg g y
• Growth in high-value consumg
strong due to the ‘acceleration
sumption has already begun
98 onward, investment/GDP
2012
al investment spending
5% ith ti5%, with consumption
mption could be extremely p y
n phenomenon’
15
Diminishing returns fromm a high investment rate
16
Investment growth haas slowed permanently
17
External imbalances are much less severe
18
How low could inve
Average real AveragePeriod
Average real growth in
investment
Averagegrowth inconsump
1996-2000 8.8% 8.9%
2001-2005 14.6% 8.6%
2006-2010 16.4% 11.1%
2011-2015e 6.5% 10.4%
2016-2020e 3.2% 9.8%
estment growth go?
e real Investmente real n final ption
Average real GDP growth
Investment ratio at end of
period
% 8.6% 34%
% 9.8% 40%
% 11.2% 46%
% 7.8% 44%
% 6.7% 39%
19
‘Acceleration’ means fast growwth in high-value consumption
20
Income inequality means a ffat tail of affluent consumers
21
4. Investment deman
• China’s capital stock per cap
large-scale investments in inf
i d t i l l t j tifi blindustrial plant are justifiable
C t t l b li f C• Contrary to popular belief C
already reasonably efficienty y
• Housing construction is abog
nd is not going away
pita is still a bit low; further
frastructure , housing and
hi ’ it l ll ti ihina’s capital allocation is
ut to plateau at a high levelp g
22
No capital misallocation: Returns in industry rise as state role shrinks
23
No capital misallocation: Low-retuurn industries get less investment
24
A chronic houssing shortageWe estimate China’s urban housing stock to comprise around 170-180m units of independent housing (those with their own kitchen and bathroom) by 2012.
This is significantly less than the total number of urban households. The remaininghouseholds. The remaining “under-housed” population is mostly migrant workers whose living quarters do not meet the definition of independent housing.
Th t l d b tThe government-led boost in the construction of low-cost housing since 2009 will help gradually address thishelp gradually address this shortage.
25
Housing construct
Policy will determine which patSupply of completed housing versus sou
12
14
8
10
6
8
mill
ion
2
4
02001 2003 2005 2007 2009 2011
New urban households Replacement
tion nears its peak
th China's housing supply takesurces of demand, in units and households
Scenario
Baseline
2013 2015 2017 2019 2021 2023 2025
t of existing housing Housing completions
CEIC, GaveKal Data
26
Outside the coast, hous
40
The most u
35
san
d
30
e, R
MB
tho
us
GuangzhouSuzhou
Nanjing
Xiamen
25
osa
ble
inco
me
Tianjin
Wenzj g
15
20
seh
old
dis
po
Taiyuan
100 250 500 750 1
Ho
us
0 250 500 750 1Average 100sq
ing is reasonably priced
unaffordable cities
Shanghai
Beijing
Shenzheng
Hangzhou
j gzhou
East South Central
Sanya
1 000 1 250 1 500 1 750 2 000
North Southwest
Northwest Northeast
1,000 1,250 1,500 1,750 2,000qm house price, RMB thousand
CEIC, NBS
27
5. Financial liberalizat
• Interest rates started to libermanagement products’ and sh
• Private sector access to capit
O t tf li i fl• Openness to portfolio inflow
• RMB is being adopted as a tr• RMB is being adopted as a tr
• But financial reforms are maBut financial reforms are maaccount can’t be fully openedmanipulating exchange and i
tion is well under way
ralize in 2010 through ‘wealth hadow banking
tal is rapidly improving
h d ti ll i dws has dramatically increased
rading currencyrading currency
inly domestic: the capitalinly domestic: the capital d while the US/EU/Japan are
nterest rates
28
De facto interest rate libberalization is advancing
29
Lending: Morre bottom up
30
Investment: LLess top down
31
A switch to promoting rather thhan restricting portfolio capital
32
A more international currency
33
Summ
1. China has begun a t‘ i l bili i‘capital mobilizationefficiency’ phase of gefficiency phase of g
2. A relatively smooth t. e at e y s oot tstructural reforms toleaders are cautious
3 Th lik l3. The most likely outcmore sustainable gromore sustainable gro
mary
ransition from the ’ h ‘ i ln’ to the ‘capital growthgrowth.transition requires t a s t o equ es
o which the new ly committed.
i l bcome is slower but owthowth.
34
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35
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The changing environmeLast decade
F h
Revenue
• Fast growth as most main early stages of developmentLi it d titi d
Revenue • Limited competition dustructural undersupply
• All firms have pricing po
Costs
• Plentiful supply of laborlow prices
Costs • Low and undifferentiatereal interest rates
Winners
• Fast-growing markets reward those who can efirst and expand capacitfirst and expand capacitmost quickly
nt for Chinese companiesNext decade
k G h i l l larkets
t
• Growth in sales volume slows as markets mature
• More competition as it t h tue to
ower
capacity catches up to demand
• Pricing power falls
r at • Restricted labor supply; high and rising wages
ed • Higher and more differentiated cost of capital
enter ty
• Slower-growing, more crowded markets reward those who can control costs
ty and develop durable competitive advantages
37
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