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Home > Blogs > Ian Fraser and Anthony Harrington > 2011: The Year Ahead – China faces interesting times

2011: The Year Ahead – China faces interesting times

Economy 2011 | 2011: The Year Ahead – China faces interesting times Ian Fraser and Anthony Harrington

When commentators in developed markets talk about China facing some difficult challenges in the year ahead, they should preface their comments by admitting that they wished their economy had anything like China’s present growth prospects.

So what are the challenges facing the Middle Kingdom? There are a number. The government has been taking steps to deal with a bubble in the housing sector that is bigger than America’s sub-prime bubble in scale. There is the background demographic issue, with the “4-2-1” policy (four grandparents, two parents, one child) set to generate a massive imbalance between the aged and the young. There is the fact that one of the main motors of China’s growth, the influx of cheap labour from the countryside to the cities, is set to close down as the migration from the countryside runs its course. There is the problem of pollution and environmental degradation as what was, until very recently, an agrarian society rapidly industrializes. And of course there is rising inflation, which according to official figures hit 5.1% in November, but is said to have already hit 10% for food prices. This is an issue the central bank has sought to deal with by reining in bank lending and via a Christmas Day rise in interest rates.

There is also an endemic issue with the inefficient allocation of capital, which is partially why China has an incredibly wasteful housing boom and is spending money recklessly on wasteful infrastructure projects.

Euan Munro, manager of the £8.6bn global absolute returns strategies fund at Standard Life Investments believes China’s future growth depends on the country being able to replace export-led growth with domestic demand. “Turning China into a consumer economy fast enough is going to be a very big challenge. It may well be one of the biggest challenges that the world faces.”

But it seems things are moving in the right direction. Morgan Stanley notes that China’s consumer spending is set to be the biggest contributor to GDP growth in 2011, “contributing more than half of the 9% growth” Morgan Stanley is forecasting for China in 2011. The New York-based bank also sees China’s worrisome current account surplus shrinking by a full point to 3.6% of GDP by the end of 2011. In fact Morgan Stanley is quite bullish about “rebalancing”:

"More broadly, external imbalances are likely to shrink in most countries, largely reflecting the rebalancing from consumption to exports in the countries with current account deficits and vice versa in surplus countries.”

Interestingly, analysts from the Carnegie Institute’s Beijing office are scathing on the topic of commentators who focus on “rebalancing” as an issue. They feel it rather misses the point. The problem with all this talk of rebalancing, particularly in the US, they argue, is that it deflects attention from much-needed domestic reforms and fuels protectionist sentiment. “The rebalancing mirage lures the thirsty in the wrong direction – one likely to lead to shirked responsibility at home and unnecessary divisions abroad,” they argue.

Why is rebalancing a mirage? Surely if China built up more domestic demand, by, for example, persuading Chinese citizens to save less and spend more, and by allowing the renmimbi to appreciate so imports are sucked in and exporting becomes less attractive, we would have less destabilising surpluses washing through the global economy?

The Carnegie Institute authors unpick this argument stitch by stitch. First off, any rebalancing that was going to happen has already happened, they argue, and it happened not through US pressure or international negotiation, but because US consumers can’t continue to spend both on imports and deleverage simultaneously. So US imports from China fell away through the recession and China’s trade surplus for 2009 vanished.

However, they argue, the recession has also made emerging markets even keener on maintaining large surpluses in order to protect themselves against future global shocks on the scale of the 2008 crunch. Conversely, the corresponding deficits in deficit economies are likely to be long lived as well, so don’t look to much more rebalancing – it isn’t going to happen. Moreover, even if China gave way to US pressure, which it won’t, and reduced its internal savings by $500 billion, all of which was spent on imports, the US share of that import bonanza, based on current market share, would amount to just $40 billion, or 0.3% of US GDP – nice, but not transformative.

For the US to get out of its present hole in 2011 it has to look to something other than a sudden surge in Chinese imports of US consumer goods (which is what rebalancing is code for, isn’t it?). Not adding to its deficit with new trillion dollar pledges would be a good start…

Most experts see 2011 as a “reflationary” year for China with fixed asset investment benefiting from the fact that 2011 is the start of China’s 12th Five Year Plan. At the same time, China’s labour market is likely to tighten further through 2011, which should help to drive up wages and increase personal consumption. Personal consumption grew at just under 10% in 2010 and is likely to improve slightly on that rate of growth through 2011.

Anthony Bolton, manager of Fidelity’s China Special Situations said:

“During the last few weeks the global bull market appears to have resumed. Emerging markets like China have benefited from the liquidity being created in the developed world. The Chinese economy has not been slowing down as fast as earlier expected and this will probably now happen in 2011. However, I continue to believe that the growth rate in China will still be very attractive relative to the growth rates being seen in the developed world.”

Further reading on the Chinese economy and Asian economies:

Tags: Asia , asset bubble , China , Chinese economy , demographics , IMF , inflation , infrastructure , US
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  1. Anonymous Comment says:
    Wed Jun 20 15:01:06 BST 2012

    Weeeee, what a quick and easy solution.
  2. leaderscorp says:
    Wed Jan 05 18:18:18 GMT 2011

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    The answer to that is something that lot of people are waiting for, and besides that everyone is anxious to see how things is going to fall in place, knowing that mortgage brokers and mortgage bankers loan officers are not a breed that enjoy the corporate way of doing business, and knowing that the big banks are not going to be hiring any new people due to the fact that they are going to be hammered with employment applications by loan officers, and that's when crisis rise again and create more trouble in this industry.

    I see another wave of crisis for the mortgage industry that is coming, and this time it is going to really hurt and take little longer for everyone to adjust, also it's going to reflect some unemployment and some financial crisis to some more people that are working hard and surviving out of today's mortgage industry, the question is when is the crisis going to end for the people that are struggling to survive in today's economy and decided not to leave the mortgage industry and decided not to work for the banks.

    I believe the answer to that, would be for the mortgage brokers and mortgage bankers to give more then what the big banks are giving to the public and to the real estate industry. It's a simple philosophy give and you will get much more in return. We have set our path for 2011 strategy and the execution of our strategy will begin in January 15th of 2011. Our strategy will create opportunities for real estate agents to have more business and develop for them a strategy for continuous growth in return to have a massive bonding strategy between the real estate agents in our market with our loan officers in exchange for the value that is provided by the services and the strategies we bring to our industry. All we would like to ask for the loan officers, the mortgage brokers and mortgage bankers that are in the industry and they are facing some financial trouble or facing frustration of growth and development for their office or their company to join us on Facebook and join our company so we could put our hands together and promote what banks can't promote, give the public and the real estate industry something that has never been provided and asking nothing in return.

    Our formula for success in 2011 is the way of conquering markets, it's the new way to conquer this industry lets come together and turn this industry to our benefit and show the banks how hard it is going to be for them when we are taking their business away, and how much this industry is in a need for our breed of professionals.



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