Research and analysis

China in numbers; New Year Special

Published 5 January 2015

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 1 August 2016

This article is no longer current. Please refer to Overseas Business Risk - China

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk - China

Summary

15 facts provide insights on what to expect from the Chinese economy in 2015. Growth is slowing but a hard-landing seems unlikely. Structural transformation is underway, supported by accelerating economic reforms. China is going global and increasingly willing to extend its regional economic influence. Will China continue to outperform? We think it probably will, at least for the next few years. However, as these facts illustrate, China’s economy is vast, rapidly-evolving and full of seeming contradictions.

Detail

Growth is slowing…

Growth probably slowed to around 7.3 percent in 2014, the lowest rate since 1990. However, given the higher base, incremental growth this year will have been around $940 billion (roughly 30 percent of the UK GDP), compared with around $500bn in 2009, when annual growth exceeded 10 percent. GDP per capita remains less than 20 percent that of the UK.

Growth will continue to slow as convergence with advanced economies continues. Moreover, China faces at least two economic headwinds. First, the total level of debt likely exceeded 250 percent of GDP this year. Most of this is corporate debt: at around $14.2 trillion, China now holds the world’s largest stock of outstanding corporate debt. The authorities are alert to the risks and are both improving regulation and slowing credit growth. A limited tolerance for default, however, ensures moral hazard remains endemic.

Second, the housing market continues to slow down. Chinese property developers now hold approximately 550 million squared metres of new housing inventories, equivalent to 50 percent of all housing sold in 2013 (Wenzhou has an estimated 40 months of inventories, the highest in China). While overall structural demand for housing in China remains strong, the housing market will remain weak for the next few years.

…####but a hard-landing seems unlikely.

This is partly because the government has huge assets, including $4 trillion in foreign exchange reserves and $17 trillion in domestic bank deposits. Also, the banking system remains under state control and there is very little foreign debt. It is therefore difficult to envisage a sudden economic crisis erupting. A more likely outcome is slowly encroaching economic sclerosis, with marginal returns on investment falling very low, as bad debts rise and increasing amounts of new credit is needed to service existing loans.

The authorities have been clear that investment remains a ‘key driver’ for stabilising growth during structural reform. Priority sectors include social housing and infrastructure, particularly in the poorer Western Provinces. In keeping with this, December this year saw the opening of a 1,776 kilometre route between Urumqi and Lanzhou. This takes China’s total high-speed rail network, which was started in 2008, to around 13,000 kilometres (or around 65 times the length of HS2 Phase 1).

Structural transformation is underway…

Following a recent revision to 2013 GDP, services are now estimated to contribute 47 percent of GDP, compared with an estimated 43 percent in 2010. Growing services companies have ensured the labour market remains tight despite the slow-down in overall GDP growth: more than 13 million urban jobs were created this year, a record year for jobs’ creation.

Although consumption as a share of GDP remains low by international comparison, household consumption is booming. On Single’s Day (11 November), the e-commerce platform Alibaba reported $9.3 billion in sales, up 60 percent from 2013 (and compared with $2.7 billion of online sales in the US-equivalent of Cyber Monday this year). Alibaba’s stock-market floatation earlier this year was the world’s largest ever, valuing the company at $230 billion and making its founder Jack Ma China’s richest man, with an estimated net worth of $30 billion.

An increasing proportion of e-commerce is mobile, via more than 700 million smart-phones. 3 of the world’s top 5 smart-phone producers are now Chinese (Huawei, Xiaomi and Lenovo), with Xiaomi’s sales rising to 16 million units in Q3 2014 from 3 million units a year earlier. We should expect to see a lot more of Xiaomi in the UK, and of other Chinese companies like it, offering good-enough quality at low prices.

…####supported by accelerating economic reforms.

2014 saw particular progress in fiscal and financial reform. The Budget Law was passed in August, following 10 years of amendments and debate. A major push is taking place on cleaning up local government finances, including trialing local bond issuances and expanding the use of PPP. The RMB trading band was widened further to 2 percent and the deposit rate was partially liberalised.

Administrative reform also accelerated. Nearly 200 central government approvals were either abolished or delegated to local governments, building on 400 from 2013. Pilot free trade zones (FTZ) were approved in Tianjin, Xiamen and Guangzhou and the pre-existing FTZ in Shanghai was quadrupled in size. A previously unimaginably bureaucratic regime controlling outward investments by Chinese firms was almost entirely liberalised.

That said, the anti-corruption campaign has been the political priority. In addition to ‘tigers’ like Zhou Yongkang (former head of internal security) and Ling Jihua (former head of the Party’s General Office), the Party’s Central Commission for Discipline Inspection punished 182, 038 Party members in 2013 with a further 10,840 investigations launched in the first three months of 2014. Some opine that this may clear the way for faster economic reforms in the years ahead.

China is increasingly going global…

Chinese overseas investment in 2014 likely reached $120 billion, having expanded by 40 percent year-on-year since 2004. The UK has been the most popular European destination for Chinese investment since 2012. Notable deals this year included the £900 million acquisition of Pizza Express by Hony Capital and Greenland’s £550 million investment into Canary Wharf. International use of the RMB continued to grow, supported by a 3 billion RMB bond issuance by HM Treasury, the first sovereign issuance ever outside of China.

…####and increasingly willing to extend its regional economic influence.

Global Financial Institutions are being reshaped by China’s increasing wiliness to deploy its $4 trillion foreign exchange reserves. The APEC meetings this November saw 21 countries sign a Memorandum of Understanding about the new Asian Infrastructure Investment Bank, to which China is contributing at least $50 billion. President Xi Jinping also announced a $40 billion Silk Road Infrastructure Fund, part of a hugely ambitious ‘One Belt, One Road’ infrastructure project that stretches from Beijing to Berlin. Hints have also been made that China is willing to act as lender-of-last resort to Russia.

The APEC meetings gave a taste for what to expect during China’s 2016 Presidency of the G20. Factories were shut, schools closed and cars banned to deliver clear skies . No risks were taken to ensure the safety of the APEC delegates.

Will China continue to outperform?

2015 would be the 37th year of near-continuous super-fast growth (i.e. above 6 percent per year) in China. This is historically unprecedented: the average length of a super-fast growth period is 9 years. Balanced against this are China’s low starting-point and an impressive track-record on implementing sensible structural reforms. Will China continue to outperform? We think it probably will for at least the next few years. However, as the above facts illustrate, China’s is a vast and rapidly-evolving economy which is full of contradictions. We are wary of those who speak too confidently about its future.