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China Economic Outlook
China Next Five Years Projection: Opportunities and Challenges
Dr. Marcus Lee
Econmomic Advisor to Chinese Municipal Governments
Chief Economist, Hampton Court Investment Bank
1. China Economic Outlook
Historical Background
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China’s composition of aggregate demand remains
heavily tilted toward investment and exports.
In 2009, gross fixed capital formation accounted for
47.5% of China’s GDP, while private consumption
provided 35.6%.
China is a relatively open economy, with exports
accounting for about 36% of GDP, according to the
World Bank Development Indicators.
China Economic Outlook 2011
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China’s economy is approaching a structural
turning point at which:
1) GDP growth: down
2) Inflation: uptrend
3) Investment’s share of GDP: decrease
4) Private consumption: up
5) Cost of Capital: up
2. Existing Challenges
1. Income Inequality
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Wealth at the coast: manufacturing and
financial sector
Comparison of per capital income:
Guizhou US$1,900 vs Shanghai US$11,500
Migration: 260 million workers relocate to
coastal
2. Excess labor supply
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push down wages, help growth rate of 11%
and inflation of 2%
Miracle has ended. Young rural worker dry
up. Rise of cost of living
In medium term, china growth and inflation
6% +/-
3. Inflation
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Although higher global commodity prices are
important factor to push up Chinese inflation,
monetary expansion is also blame.
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China’s CPI y/y increase:
March 5.4%
June 5.5%
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banks’ required reserve ratio to a record-high 20.5%
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only managed to sterilize about two-thirds of the
valuation-adjusted capital inflow in Q1 2011
3. China 12th Five Years Plan
The 12th Five Years Plan
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Focus: Quality vs Growth
3 Key Themes:
i) Economic Restructuring
Ii) Social Equality
Iii) Environment Protection
Policy Directions
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Shift from “Growth at any cost” toward a more
balance growth under the “Harmonious Society” (和
谐社会)
Financial Crisis: aware need of change of growth
model.
Overreliance on investment and export to
consumption-led growth. Increase consumption by
raising income and social benefits.
Restructuring Economy
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Financial crisis impact – layoff of millions of factory
worker. more stable growth model
Unsustainable – High growth rate, large global trade
and fx imbalances which led to tensions b/w china
and its major trading partner.
Inefficient use of resources – over heating
investment in certain sector
12th FYP Policies Focus
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Support lower GDP Growth – 7%
Consumption driven economy
Upgraded industries
Creation of more “National Champions”
Strategic Emerging Industries (SEI)
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There are Seven SEI:
1. Biotechnology
2. New Energy
3. High End Equipment Manufacturing
4. Energy Conservation and Environment
5. Clean Energy Vehicles
6. New Materials
7. Next Generation IT
China Government prepare to spend more than RMB4 trillion
on these industries in the next 5 years.
Consumption
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Inclusive Growth: benefits wider community
Reduce dependency on export, surplus and
maintain an artificially weak currency
Consumption: Rise from 35% of GDP (2010)
to 40% within 5 years. (Compare to US 71%,
Brazil 63%, India 54%)
Social Equality
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Changed from “Strong State, Wealthy People (国富民强) to
“Wealthy People, Strong State” (民富国强).
Reducing Rich and Poor Gap in Urban/Rural by Urbanization,
Reform of outdated Household Registration System
Provide Social Safety Net: Basic Health Care coverage and
rural land distribution
Increase minimum wages by 40% by 2015.
Environment Protection
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Mandatory energy emissions target of 17%.
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Hold local government officers accountable: water
consumption per unit of GDP, % of GDP invested in
environment etc
Carbon tax by 2013, Carbon trading system by 2015
15% of energy from non-fossil fuels by 2020, Cap on domestic
coal production, increase support for nuclear and hydropower
4. Sector Watch
1: Healthcare
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Healthcare Reform: expand basic access, modernize
infrastructure, improve delivery, invest in healthcare IT.
Pharmaceutical Consolidation: Change 13,000 small
distribution to 2 national level (RMB100 billion revenue)and 20
regional level companies (RMB10 billion).
Biotechnology: Innovation, high-end medical devices,
patented medicines. Gov will spend RMB12 billion for R&D in
new drugs. (2011-2015)
2: Energy and Environment
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Annual Growth 15-20%
Gov will invest RMB3 Trillion (2011-2015)
Consolidation of Coal Sector: 11000 to 4000 companies, with 810 control for 60% of all production.
Nuclear and Hydropower: 11 to 25 nuclear power plants by
2015.
3 out of 7 SEI is devoted: Energy Efficiency and Environment,
New Energy, New Energy Vehicles. Battery cell technology to
produce 1 milion by 2015.
3: Technology
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Move from “Made in China” to “Designed in China”.
Next Generation IT: information networks, mobile
communication and internet, cloud computing etc.
R&D: Invest in core electronic devices, integrated
circuits, life sciences, space, marine, earth sciences
and nanotechnology.
5. Policy Implications
Risks
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government still believes that the road to
consumption-led growth runs through more
investment
Upside Risk:
Consumption accelerates as per capita GDP
exceeds US$5,000.
Downside Risk:
Nonperforming loans increase earlier than
anticipated, pulling forward the expected
recapitalization of the banking sector.
Interest Rates and Inflation
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maintain a tightening bias, and we expect
three more interest rate hikes in 2011,
bringing the one-year deposit rate to 3.75%.
Demand-side pressures will keep inflation
near 5% y/y into Q3
but the CPI will decelerate to 3.5% by
December as food and oil prices moderate.
Impact for Foreign Companies
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Industrial Upgrading: preferential policies
maybe bias to domestic firm. Use
partnership with local firm for better access.
Changes of business environment: expect
cost to rise: minimum wage hikes, value
added tax, raw material price, environment
tax.
6. Conclusion
Rhetoric vs Reality
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Despite new FYP aims to increase the share of
consumption in GDP, it is still struggling.
The details of the new plan reveal continued
reliance on investment, including public
housing, to support growth..
Closing Note
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No rebalancing of growth in 2011 as the government
prioritizes investment for at least another year.
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Continue monetary tightening through Q3 2011
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Allow the RMB to appreciate 4-6% throughout the year.
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The “proactive” fiscal policy for 2011 will be looser
than government accounting implies.
Thank you
Dr. Marcus Lee
Managing Director
Hampton Court Investment Bank
168, Yin cheng Zhong Road, Bank of Shanghai,
21st floor, Shanghai 200120
The People’s Republic of China
Tel: (8621) 5116-7122
Fax: (8621) 5116-7116
Email: [email protected]
Website: www.hamcot.com