Koebler - China

7/29/2019 Koebler - China

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Chinas

Model

Arthur Kroeber February 2013


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China is still growi

1. GDP growth will average 7% in 201

2. Structural reforms are necessary fo

deliver enough despite political op

. e growt r ver s a rea y s t n

. eman or nves men n n ras r

strong and will be a key swing fact

5. Financial liberalization is moving f

g but differently

2-20, down from 11% in 2002-11

r that level of growth; new leaders will

position and debt constraints

g rom nvestment to consumpt on

c ure, ous ng an new p an s s

r

ster than many realize, but capital

2


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1. Trend growth is sl

At 20% of US per capita GD

enjoy another decade of fast

mo e o apan, orea an a

o en a grow s now aro

the ast decade, and volatilit

Yet thanks to the high base

will continue to grow rapidly

wing, but still solid

(at PPP), China still can still

atch-up growth on the

wan

n - , own rom n

will rise

ffect, Chinas global impact

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Catch-up growth still has a long way to run

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but the potential GDP growth rate is now lower

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yet slower growth does not ean China gets less important

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The low volatility of 2 01-07 will not return

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2. Policy shifts from cyclical ma

Governments ability to smooan nvestment s constra ne

ratios

Achieving potential growth re

capital allocation:

o Financial liberalization hi h

o Competition (curta

o Factor prices (ener

incrementally

nagement to structural reform

h cycles by pumping up credity g nvestment an e t

quires reforms to improve

r return on investment

l SOEs and local protectionism)

y, water, land)

,

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The downturn in China was early as severe as in 2008

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yet the policy resp nse was much weaker

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Politics does not explain wh China was slow to stimulate

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The real constraint: De t levels are now higher

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Another constraint: Tight job mark t means more inflationary pressure

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New leaders: ca

Chinas n

The Politburo Standing Committe

rankName

yearNew j

1 Xi Jinping 1953 Presid

2 Li Keqiang 1955 Premi

ang e ang

4 Yu Zhengsheng 1945 CPPC

5 Liu Yunshan 1947 Vice P

6 Wang Qishan 1948 Discip

7 Zhang Gaoli 1946 Execu

*

tious reformers

w guard

e of the 18th Central Committee

b* Old job

ent Vice President

r Executive Vice Premier

a rman ongq ng

Chairman Shanghai chief

resident Propaganda chief

line chief Vice Premier

ive Vice Premier Tianjin chief

.

Xinhua, GK Dragonomics research

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3. Rebalancing to more con

After rising steadily from 19

ratio fell slightly in 2011 and

By the end of the decade re

grow cou e as ow as -

rowin nearl double that

Growth in high-value consu

strong due to the acceleratio

umption has already begun

8 onward, investment/GDP

012

l investment spending

, w consump on

ption could be extremely

phenomenon

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Diminishing returns fro a high investment rate

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Investment growth has slowed permanently

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External imbalances are much less severe

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How low could inve

Period

growth in

investment

growth i

consum

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

stment growth go?

final

tion

Average real

GDP growth

ratio at end of

period

8.6% 34%

9.8% 40%

11.2% 46%

7.8% 44%

6.7% 39%

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Acceleration means fast gro th in high-value consumption

20

f ff


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Income inequality means a at tail of affluent consumers

21

4 I d

d i i


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4. Investment dema

Chinas capital stock per caplarge-scale investments in in

n us r a p an are us a e

on rary o popu ar e e

alread reasonabl efficient

Housing construction is abo

d is not going away

ita is still a bit low; furtherrastructure , housing and

nas cap a a oca on s

ut to plateau at a high level

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N it l i ll ti R t i i d t i t t l h i k


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No capital misallocation: Returns in industry rise as state role shrinks

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N it l i ll ti L t i d t i t l i t t


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No capital misallocation: Low-ret rn industries get less investment

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A h i h i h t


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A chronic housing shortageWe estimate Chinas 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

under-housed population

is mostly migrant workers

whose living quarters do notmeet the definition of

independent housing.

e governmen - e oos

in the construction of low-cost housing since 2009 will

hel raduall address this

shortage.

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Housing construc ion nears its peak


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Housing construc

Policy will determine which pa

Supply of completed housing versus so

12

14

10

6million

2

4

0 2001 2003 2005 2007 2009 2011

New urban households Replacement

ion nears its peak

h China's housing supply takes

rces of demand, in units and households

Scenario

Baseline

2013 2015 2017 2019 2021 2023 2025

of existing housing Housing completions

CEIC, GaveKal Data

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Outside the coast hous

ing is reasonably priced


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Outside the coast, hous

40

The most

35

and

30

,RMBtho

u Guangzhou

Suzhou

Nanjing

Xiamen

25

sableincom

Tianjin

Wenz

15

20

seholddispo

Taiyuan

10

Hou

Average 100s

ing is reasonably priced

naffordable cities

Shanghai

Beijing

Shenzhen

Hangzhou

hou

East South Central

Sanya

North Southwest

Northwest Northeast

, , , , ,

m house price, RMB thousand

CEIC, NBS

27

5 Financial liberaliza ion is well under way


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5. Financial liberaliza

Interest rates started to libe

management products and s

Private sector access to capi

penness o por o o n o

account cant be fully opened

manipulating exchange and i

ion is well under way

alize in 2010 through wealthhadow banking

al is rapidly improving

s as rama ca y ncrease

while the US/EU/Japan are

nterest rates

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De facto interest rate li eralization is advancing


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De facto interest rate li eralization is advancing

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Lending: Mo e bottom up


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Lending: Mo e bottom up

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Investment: ess top down


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Investment: ess top down

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A switch to promoting rather t an restricting portfolio capital


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A switch to promoting rather t an restricting portfolio capital

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A more international currency


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A more international currency

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Sum ary


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Sum

1. China has begun a tcap ta mo zat on

2. A relativel smooth

structural reforms tleaders are cautious

. e most e y outc

ary

ransition from theto t e cap ta

.ransition re uires

which the newly committed.

ome s s ower ut.

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Contact &

disclaimer


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Contact &

Than

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GK Drag

3607-09 Soho Nexus Center, 19A Don

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nomics

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ekal.com

.

The changing environment for Chinese companies


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g g

Last decade

Revenue

Fast growth as most m

in early stages of

development

m te compet t on

structural undersupply All firms have pricing p

Plentiful supply of labo

low prices Low and undifferentiat

real interest rates

Winners

Fast-growing markets

reward those who can

most quickly

p

Next decade

rkets Growth in sales volume slows

as markets mature

More competition as

e to

wer

capac ty catc es up to

demand Pricing power falls

at Restricted labor supply; high

and rising wagesd Higher and more

differentiated cost of capital

nter

Slower-growing, more

crowded markets rewardthose who can control costs

and develop durable

competitive advantages

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Koebler - China

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