Download Economic Insight: Greater China

Economic Insight:
Greater China
Welcome to ICAEW’s Economic Insight: Greater China, the
quarterly forecast for the region prepared directly for
the finance profession. Produced by Oxford Economics,
ICAEW’s partner and acknowledged expert in global
economic forecasting, it provides a unique perspective
on the prospects for Greater China as a whole and for the
region’s individual countries. We focus on Greater China as
being mainland China, Hong Kong and Macau.
Quarterly briefing Q2 2016
This issue of Economic Insight: Greater China provides insight
on the dynamics of productivity growth in the Chinese
economy. We focus on China given its weight in the
region.1
Is China’s productivity surge in the past?
Key findings
• China’s economy delivered impressive gains in
productivity through 2000–2015, three times as fast as
the ASEAN average. But comparing China’s performance
to the transition path of Japan and Korea in past decades
is a more appropriate benchmark. China’s productivity
performance since 2005 is well aligned with Japanese
productivity growth from 1960 onwards, and Korean
productivity growth from 1980.
• Productivity growth is expected to ease in the 2016–2020
period, as capital investment slows. But nevertheless the
mechanisation of agriculture, diversion of investment
towards more profitable manufacturing sectors, and
increasing role for higher value-added services, should
support productivity growth.
We also assess latest economic developments in China and
the wider region, including Hong Kong and Macau.
• Recent stimulus measures in China have supported a
recovery in real estate investment, as well as spurring
long-term infrastructure development. An expansionary
fiscal stance has also supported household spending in
the first half of 2016. As a result, we have revised upwards
our forecast for Chinese GDP growth from 6.3% to 6.5%.
• However, we continue to expect a gradual slowing in
GDP growth over the next few years as the economy
rebalances. China’s transition from an export and
investment-led model of growth towards consumer
spending and more service sector activity remains the
priority.
An impressive productivity performance
China’s entry into the global economy, accession to the
World Trade Organization and integration into world supply
chains, has yielded a rapid increase in productivity in recent
decades. Output per worker has risen an average of 9% per
year from 2000 to 2015 (see figure 1), increasing the level
of output per worker 260% over the same period. This is
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three times as fast as other emerging market regions such
as ASEAN or Central and Eastern Europe.
Elsewhere in the region, Macau’s output per worker has
increased by an impressive 5.4% per year over the same
period. Hong Kong delivered a productivity performance
within the range of other emerging Asian economies – at
2.5% per year productivity growth was 0.5 percentage
points (pp) slower than the ASEAN average, but 0.5pp
faster than in Malaysia and 1pp faster than Singapore.
Figure 1: Emerging markets’ productivity performance
% average annual growth in GDP per worker, 2000–2015
10
8
4
2
China
Macau
ASEAN
Africa
Central and
Eastern Europe
Hong Kong
Turkey
Middle East
Latin America
0
Figure 3: Contributions to Chinese productivity growth
%
12
Source: Oxford Economics/Haver Analytics
Output per worker in China in 2000 was just $1,700 –
around half the level of the Philippines or Thailand at
the time, and a fraction of the output per worker in
Malaysia and Singapore. As such, there was massive scope
for catch-up growth versus higher-income economies.
China’s performance is comparable with the rate of
economic development seen in Japan and Korea as
they industrialised (see figure 2). Japan also experienced
double-digit productivity growth through much of the
1960s, and Korean productivity growth was only slightly
lower during the 1980s. In both economies output per
worker growth eased in subsequent decades as the early
gains from urbanisation, switchover from agriculture to
manufacturing and integration into world supply chains
are absorbed. This is the phase China now appears to be
entering.
Figure 2: Chinese productivity – historical comparisons
% annual growth in output per worker
16
China, 2005 onwards
14
Korea, 1980 onwards
12
Japan, 1960 onwards
OE forecast
8
6
4
2
0
-2
-4
4
7
10
13
16
19
22
25
28
Sectoral shift
Sectoral productivity growth
TFP
10
Capital Accumulation
8
6
4
2
0
2000–2005–
2006–2010
2011–2015
2016–2020
Source: Oxford Economics/Haver Analytics
However, measurement of China’s physical capital stock is
notoriously difficult, and different studies have as a result
produced very widely varying estimates of TFP growth.2
As such, an alternative means is to examine sectoral
allocation of workers and break down overall productivity
growth into a contribution from sectoral shift and growth
in output per worker within each industry.
In this case, there is a contribution of around 1.5–2.5pp
from shifting workers into higher value-added sectors, and
6-8pp per year from productivity growth within sectors.
This sectoral productivity growth incorporates both TFP
and capital deepening elements within a given sector.
Once sectoral shift is complete, this component is likely to
be the principle driver of overall productivity growth.
10
1
Capital accumulation has contributed a relatively stable
5pp or so per year to output per worker growth in China
through the past 15 years, with larger variations in TFP –
from as much as 5pp in 2006–2010 to 1.7pp in the most
recent five-year period.
Looking ahead, our forecast assumes a relatively modest
pace of TFP growth, contributing around 1.2pp per
annum to overall productivity growth in the coming five
years. Similarly, the degree of spare capacity in many
manufacturing sectors, and a greater role for less capitalintensive service sectors will mean slower growth in the
capital stock. This means the contribution to productivity
growth from increased capital per worker will ease to 4.4%
per year during the 2016–2020 period, 1.4pp slower than
in 2011–2015.
6
-2
contribution to worker productivity of changes in the level
of capital (ie, machinery) available for each worker, and
improvements in total factor productivity (TFP) ie, the
efficiency with which labour and capital are combined. TFP
is driven by a range of wider economic and social factors,
including worker skills, the flexibility with which businesses
can operate and deploy workers, and the environment for
innovation and research. We will explore these drivers in
more detail in the next edition of this report.
31
34
37
Years from starting point
Source: Oxford Economics/Haver Analytics
China’s rapid growth has been facilitated by high levels
of investment, peaking at 45% of GDP in 2013 and
only easing by around half a percentage point of GDP
since. Figure 3 shows a ‘growth accounting’ perspective
of China’s productivity growth, which separates the
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40
Looking forward, there seems less scope for contribution
from sectoral shift at a broad level. An ever-increasing share
of China’s remaining rural population is aged above 40,
meaning less scope for migration. In any case China will
still need a substantial agricultural workforce to feed its (still
growing) population. Plus, of those migrants that do make
the switch to the city, an increasing share will be employed
in service sectors, which although still far more productive
in level terms than primary sectors (defined as agriculture,
forestry and fishing), generate around 40% less output per
head than manufacturing (see figure 4).
ECONOMIC INSIGHT – GRE ATER CHIN A Q2 2 016
Figure 4: China sectoral productivity levels and growth
Annual average %
growth, 2000–2015
120
9
8
100
7
6
80
5
60
4
40
3
2
20
1
0
Primary
Secondary
0
Tertiary
Source: Oxford Economics/Haver Analytics
Looking ahead therefore, with less gain from sectoral
shift, prospects depend more heavily on productivity
gains within broad economic sectors – agriculture,
manufacturing and services.
Supporting ongoing productivity in the manufacturing
sector will also be crucial. Much of the sector’s
productivity gains in recent years came via substantial
capital investment, particularly in heavy industrial sectors.
But with excess supply in many of these industries, capital
spending needs to be redeployed towards more profitable
sectors.
This seems to already be happening. Figure 6 shows
average changes in investment spend for Chinese heavy
industry and manufacturing sectors through 2014–2015
and the corresponding profit ratio for the sector in 2014,
the latest point for which data are available. During
this period, more profitable sectors were attracting
higher rates of investment growth – an encouraging
development. And in light of the slump in commodity and
steel prices, it seems likely profit margins in these sectors
will have fallen further through 2015 and into 2016.
Figure 6: Investment and profitability in Chinese
industry
30
As the red markers in Figure 4 show, China’s agricultural
sector has achieved impressive efficiency improvements in
recent decades, and is well ahead of many other emerging
market economies in some measures of productivity.
Average cereal yield per hectare in China is currently
just over 5,000kg, around 1,000kg higher than in Latin
America. Moreover, the yield of Chinese farms looks to be
well correlated with performance in the US, allowing for a
10-year lag (see figure 5), suggesting further gains in the
years ahead.
Sustaining this productivity performance is critical to
ensuring continuity in domestic food supply that has
long been a key policy goal for successive Chinese
governments. China will need to feed a still-growing
population with a shrinking agricultural workforce.
Cultural and sports items
25
Average growth in investment 2014–2015
Thousand yuan per worker 2015,
2005 prices
Furniture
Printing and recording
Clothes
20
Food
15
Pharma
Non-metallic minerals
Computers
10
Instrument & Meter
Chemicals
5
Chemical fibres
0
Paper making
Other metal extraction
NF metal
processsing
-5
Fuels
-10
-15
Ferrous metal
processing
0
Ferrous metal
extraction
Coal extraction
2
4
6
8
10
Profits as % of sales revenue, 2014
Figure 5: Agricultural productivity in China and the US
Source: Oxford Economics/Haver Analytics
Cereal yield per hectare, thousand kilogrammes
But it will require substantial political commitment to
allow spare capacity in heavy industry to close down.
There are signs that in some regions, part of the lending
triggered by recent stimulus measures has found its way
into sectors with spare capacity. If productivity growth
is to be sustained in manufacturing in the years ahead,
it will be important for firms in profitable sectors to have
the access to capital and workers they need to expand in
the years to come. Given the increased role household
spending will play in economic growth, this will be
especially pertinent for consumer-facing manufacturers.
8
China, lagged 10 years
7
US
6
5
4
3
2
1
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
Source: Oxford Economics/Haver Analytics
Facilitating the mechanisation of agriculture is a key
priority for the 13th five-year plan, covering the period
2016–2020, aided by (as yet relatively unclear) plans for
land reform. A key feature of monetary stimulus in recent
months has therefore been targeted lending towards the
sector, building on progress made in compiling a credit
register of farmers in the past few years. Lending by the
Agricultural Development Bank of China rose by $60bn in
the first quarter of 2016, twice as fast as during the same
period of 2015. So while demand of investment goods
for manufacturing or residential construction may grow
less quickly than in recent years, demand for capital in
the agricultural sector could in fact grow more strongly,
providing opportunities for both domestic and overseas
producers of such goods.
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Finally, sustaining growth in service sector productivity
will require creation of higher value-added service sector
roles. Data on employment by detailed service sector
in China is only available for urban workers (output
data is only available for the whole economy), making
comparisons of productivity across the service sector
impossible. Nevertheless, growth in high value-added
sectors suggests productivity growth in the service sector
as a whole should also be rising.
Around 30m new service sector jobs were created in
China from 2003–2014, and the share of total service
employment in finance, real estate, business, science and
IT has risen from 17% to 24% over the same period
(see figure 7). Sustaining this job creation in higher
value-added sectors will rely on a range of productivitysupporting factors though, in particular ongoing
improvement in training and education to enable firms
to find the skilled workers such positions need.
ECONOMIC INSIGHT – GRE ATER CHIN A Q2 2 016
Figure 7: Service sector employment
Figure 9: Social financing in China
% of total urban service sector employment
% of GDP, 3 month moving average
100
60
80
50
Total social financing ex equity and other
Bank lending
Shadow banking (Oxford Economics)
60
40
40
30
20
20
0
2004
2006
2008
2010
Finance, real estate and business,
science and tech, ICT
2012
Transport,
consumer
2014
10
Public,
other
0
2012
2013
2014
2015
2016
Source: Oxford Economics/Haver Analytics
Source: Oxford Economics, CEIC Data
Nevertheless, across sectors productivity performance
is likely to be somewhat weaker in the coming 5 years
than the average of the past 15, consistent with the
continuation of the ‘catch-up’ pattern illustrated in
figure 2. Within this, productivity growth in industrial
(ie, secondary) sectors will slow most, as capital
investment is slower than in past decades. Productivity
in the primary and tertiary sectors, where it is harder to
argue there has been excessive investment, should be
more robust.
Figure 8: Sectoral productivity forecasts
For now, it looks as though the recovery in price growth
(see figure 10) remains relatively contained to Tier 1
cities (Beijing, Shanghai, Guangzhou and Shenzhen).
As such, for now there seems less reason to worry about
the sustainability of China’s property market than during
previous episodes of investment growth.
Figure 10: House prices in Chinese cities
% change, month on month
4
First tier cities
Second tier cities
Third tier cities
% growth per year
2000–2015
9
2016–2020
3
8
2
7
6
1
5
4
0
3
2
-1
1
0
Primary
Secondary
Tertiary
Source: Oxford Economics/Haver Analytics
-2
2011
2012
2013
2014
2015
2016
Source: Oxford Economics/Haver Analytics
Latest China economic outlook
As part of efforts to diversify the economy, as well as
support activity during a period of weak global trade,
the Chinese Government set out ambitious targets for
lending growth. This led to a surge in borrowing, among
agricultural firms as already noted, but also for other
forms of fixed investment (see figure 9). Both traditional
bank lending and ‘shadow banking’3 were part of this
pickup, and the overall ratio of social financing to GDP
rose to its highest rate since 2013.
However, some of the pickup in credit has found its way
into the property market – residential sales were up
sharply, as more worryingly was the area of new
residential property under development. This has
supported activity across the industrial sector,
particularly in construction materials. It will be important
for the government to ensure this rebound remains
sustainable for two reasons. Firstly, averting price
bubbles and the consequent risks to financial stability.
As important, though, is the need to ensure market
signals to the heavy industry sector about the need to
cut capacity are not blurred by periods of temporarily
higher demand.
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The other main beneficiary of renewed stimulus has been
investment in infrastructure. Fixed asset investment in
infrastructure grew by 21% in the year to March. However,
along with the measures to support workers affected by
industrial job losses, this has meant a substantial increase
in the public deficit, approaching 4% of GDP in the first
half of 2016.
Consumer spending has also held up well in recent months
and should continue to provide a key growth driver in the
near term. Weakness in energy prices, otherwise subdued
inflation and ongoing wage growth and service sector job
creation, have supported household spending through the
first quarter. Retail sales were up 9.8% on a year earlier in
Q1, while car sales (to dealers) were up 9.7% in the year
to March. This was an encouraging sign of resilience given
the volatility in global financial markets. We have revised
up our forecast for GDP growth in 2016 from 6.3% in our
last report to 6.5% in this edition.
However, the support from the most recent bout of
stimulus will fade through 2016 and into 2017, and as
such the pace of growth is likely to slow (barring further
ECONOMIC INSIGHT – GRE ATER CHIN A Q2 2 016
such measures). We continue to expect GDP growth of just
about 6% per annum in both 2017 and 2018, easing further
thereafter. Within this, consumer spending growth should
remain a key driver, with public spending and investment
making decreasing contributions to growth in later years.
Figure 11: Contributions to GDP growth in China
Percentage point contribution to GDP growth
20
15
Forecast
10
Greater China economic outlook
The resilience in Chinese activity does not yet seem to
be spilling over to the wider Greater China region though.
Hong Kong has continued to lose economic momentum
in the first half of 2016, with merchandise exports falling
for an 11th consecutive month in March 2016, and
the Purchasing Managers’ Index4 falling to 45.5 – a
seven-month low. Falling tourism and concern over
domestic economic activity have driven a sharp fall in
retail sales, down 12% on the year in January and February.
Owing to this weakness in Q1 2016 we have revised down
our forecast for GDP growth in 2016 by 0.3pp to 1.3%,
with 2.2% now expected for 2017.
Net exports
Private consumption
Investment
Macau suffered after a 20% contraction in 2015, thanks to
a confluence of several damaging one-off factors impacting
the tourism sector. These included the easing of visa
regulations for Chinese tourists visiting other parts of Asia,
the introduction of a smoking ban in casinos, and strict
new anti-corruption and money laundering regulations in
China. With these factors unlikely to reverse we view the
contraction of 2015 as a level shift. As such we expect only
the most modest rebound in 2016, with GDP growing by
2%, picking up to 4.4% next year.
Public consumption
Stockbuilding
GDP (% year)
Figure 12: GDP growth in Greater China region
5
0
-5
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: Oxford Economics/Haver Analytics
Even this pace should be more than enough to spur sufficient
job creation to absorb new city-dwellers and those facing
job losses in manufacturing, as long as the right support for
redeployment and retraining is provided. 12m new jobs were
created in net terms in 2015, and rebalancing toward less
capital-intensive service sectors will mean growth becomes
increasingly ‘job-rich’ in the years ahead.
But it may not be sufficient to meet the government’s
target of doubling the level of real GDP between 2010
and 2020, set out in October 2015. This only seems likely
with further stimulus, which could in turn undermine the
pace of rebalancing and accentuate the risk of bad debt
accumulating in the property and industrial sectors.
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%
10
5
0
-5
2015
2016
2017
-10
-15
-20
China
Hong Kong, China
Macao, China
Source: Oxford Economics/Haver Analytics
ECONOMIC INSIGHT – GRE ATER CHIN A Q2 2 016
ENDNOTES
1 IMF estimates of US$ GDP for 2015 indicate that China accounted for 97% of GDP across the
three economies.
2 For example, the Asian Development Bank found that average TFP growth from 1980 to 2010
was around 4% per annum, while the Chinese Centre for Economics and Business estimates TFP
growth for 1977 to 2012 at just 1% per annum.
3 Financial intermediation outside the traditional banking sector. This includes a number of
different types of instruments, including: corporate-to-corporate loans (otherwise known as
‘entrusted’ loans), letters of guarantee (known as ‘bankers acceptances’), trust loans (in which a
trust company intermediates between a borrower and investor for a fee), and corporate bonds.
4 A widely-watched measure of business activity, with 50 indicating flat output, above 50 indicating
expansion and below 50 indicating contraction.
For enquiries or additional information, please contact:
Juni Ngai, Director, Hong Kong
T +852 2287 7277 / 6381 1687
E [email protected]
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