Two-speed econ­omy creates bal­ance

Emer­gence of fast-grow­ing sec­tors as man­u­fac­tur­ing evolves may lead China into a Sin­ga­pore-like sys­tem, UBS ex­ec­u­tive tells Ce­cily Liu.

China Daily (Canada) - - EXPATS -

China is grow­ing as a two-speed econ­omy, with the slower sec­tors of the old econ­omy grad­u­ally giv­ing away to sec­tors of the newer econ­omy. To­gether they’re cre­at­ing a sus­tain­able and bal­anced growth model, said Tan Min Lan, head of the Asia-Pa­cific in­vest­ment of­fice of UBS Wealth Man­age­ment.

This unique sys­tem of twospeed growth be­hind China’s head­line GDP fig­ures will have sig­nif­i­cant in­ter­na­tional im­pli­ca­tions as it al­lows China to have more stable growth.

The more stable and sus­tain­able growth brought about by the new lead­ing sec­tors will help to boost con­fi­dence of other Asian economies, al­though China’s re­duced com­mod­ity de­mand will con­tinue to hit com­mod­ity ex­porters, Tan said.

“I think it leads China to a lower path of growth but a more stable one. The old sec­tors are fall­ing apart, but at the same time the gov­ern­ment wants to cre­ate growth in more stable sec­tors that are less dam­ag­ing to the en­vi­ron­ment,” she said.

Within this new growth struc­ture, the heavy, older, tra­di­tional in­dus­tries such as coal, ce­ment, glass and steel are slow­ing down fast, while emerg­ing in­dus­tries like health­care in­sur­ance, the In­ter­net and al­ter­na­tive en­er­gies are rapidly be­com­ing the back­bone of China’s eco­nomic growth.

To put this into con­text, the MSCI China In­dex for the first half of this year mea­sured China’s growth at about 5 per­cent, but this growth rate would have been 10 per­cent if the mea­sure­ment stripped out the ef­fects of the bank­ing sec­tor, and 25 per­cent if the en­ergy sec­tor also was de­ducted.

The MSCI China In­dex cap­tures large and mid-cap stocks across China H shares, B shares, red chips and P chips. The in­dex cov­ers about 85 per­cent of China’s eq­uity uni­verse.

Mean­while, elec­tric­ity consumption fig­ures, which are re­liant on heavy in­dus­try, grew only at 0.3 per­cent year on year, suggest­ing that the old driv­ers of China’s GDP growth are nearly, if not al­ready, in re­ces­sion.

This di­ver­sity of growth rates points to the im­por­tance of an­a­lyz­ing spe­cific sec­tors within China’s econ­omy rather than judg­ing its eco­nomic growth based on head­line GDP fig­ures.

The two-speed model is the one that helps China achieve the eco­nomic re­bal­anc­ing it de­sires, which puts China in tran­si­tion from a man­u­fac­tur­ing fo­cus to ser­vice-based growth, from in­vest­ment to consumption, and from la­bor­in­ten­sive pro­duc­tion to high­tech­nol­ogy and ad­vanced man­u­fac­tur­ing.

Within this con­text, in­dus­tries like e-commerce, In­ter­net in­dus­tries and health­care in­sur­ance are grow­ing fast be­cause of the emer­gence of China’s mid­dle class and the grow­ing spend­ing power of this pop­u­la­tion.

China’s ser­vice pur­chas­ing man­agers in­dex mea­sured 50.5 in Septem­ber, com­pared with 49.8 for man­u­fac­tur­ing in the same month. PMI is an indi­ca­tor of busi­ness ac­tiv­ity. It is a sur­vey-based mea­sure that asks re­spon­dents about changes in their per­cep­tion of some key busi­ness vari­ables from the month be­fore.

In ad­di­tion, many of China’s other eco­nomic in­di­ca­tors also paint an op­ti­mistic pic­ture of the econ­omy, in­clud­ing wage in­fla­tion and re­tail sec­tor growth.

Salaries are grow­ing at about 10 per­cent a year, while re­tail is reg­is­ter­ing 11 per­cent growth, ac­cord­ing to of­fi­cial data.

“Th­ese all show a bullish story on China, and things are not as bad as in­dus­trial data will sug­gest,” Tan said, adding that her of­fice es­ti­mates that China’s growth next year will be around 6.2 per­cent, which is not far off the 6.5 per­cent tar­get set by the Chi­nese gov­ern­ment.

Out of this 6.2 per­cent, around 3.5 per­cent growth is pre­dicted to be driven by consumption, 0.5 per­cent by net ex­port and be­tween 2 and 2.5 per­cent by in­vest­ment, de­pend­ing on how quickly the Chi­nese gov­ern­ment im­ple­ments in­fra­struc­ture ex­pan­sion plans.

How­ever, Tan pointed out that it is also im­por­tant for China to main­tain its man­u­fac­tur­ing in­dus­try, as op­posed to let­ting it go com­pletely or re­duc­ing it to a tiny part of GDP.

In this re­spect, the eco­nomic model China evolves into may be more like that of Sin­ga­pore, where the gov­ern­ment is con­sciously im­ple­ment­ing poli­cies to en­cour­age the growth of the man­u­fac­tur­ing sec­tor and avoid hol­low­ing out. It con­trasts with the Western model of a ser­vice-based econ­omy, led by coun­tries like the United States. Cur­rently man­u­fac­tur­ing ac­counts for about one-fourth of Sin­ga­pore’s GDP growth.

One im­por­tant rea­son for China to main­tain its man­u­fac­tur­ing sec­tor is that Chi­nese com­pa­nies would have a bet­ter op­por­tu­nity to learn in­ter­na­tional best prac­tices through man­u­fac­tur­ing, which has a big­ger ex­port com­po­nent, said Tan.

“With the pro­vi­sion of ser­vices, you tend to do them lo­cally, so the growth of China’s ser­vice in­dus­try would be fo­cused on pro­vi­sion of ser­vices in China. But man­u­fac­tur­ing in­dus­tries will more of­ten lead to ex­ports abroad, mean­ing that Chi­nese com­pa­nies can learn from coun­ter­parts over­seas to be­come in­ter­na­tion­ally com­pet­i­tive.”

This learn­ing process would in­volve ac­quir­ing man­age­ment skills and ex­per­tise, and im­prov­ing the qual­ity of man­u­fac­tur­ing. This man­u­fac­tur­ing work should fo­cus on high­end and ad­vanced tech­nol­ogy in­dus­tries, she said.

The growth of both ad­vanced tech­nol­ogy and ser­vices would lead to more sus­tain­able growth, and for­eign in­vest­ments in China would be re­mod­eled with cal­cu­la­tions based on lower risk pre­mi­ums when the risk re­turn pro­file is con­sid­ered, Tan said. “The loss in earn­ings growth will be as­so­ci­ated with a re­duc­tion in risk pre­mi­ums, so the val­u­a­tion of Chi­nese in­vest­ment op­por­tu­ni­ties will not go down.”

An ad­di­tional rea­son that a de­vel­oped Asian econ­omy like Sin­ga­pore is able to pro­vide more in­spi­ra­tion to China than the US and other Western economies is the role its strong gov­ern­ment plays in its econ­omy.

“China is his­tor­i­cally a planned econ­omy, so within this cul­tural con­text, China is more sim­i­lar to Sin­ga­pore, where the gov­ern­ment de­ter­mines key in­dus­tries to fo­cus on, rather than let­ting pri­vate sec­tor mar­ket forces take the lead,” Tan said.

She said to move closer to this de­sired model, China needs to read­just the amount of cen­tral gov­ern­ment and lo­cal gov­ern­ment in­flu­ence on its econ­omy. In as­pects like the pro­vi­sion of univer­sal health­care in­sur­ance, pro­vi­sion of ba­sic hous­ing and the pen­sion sys­tem, the cen­tral gov­ern­ment needs to take more con­trol.

“China is an in­ter­est­ing econ­omy, as some­times it has too much gov­ern­ment in­ter­ven­tion and some­times too lit­tle. Some­times a lot of big de­ci­sions are taken at the cen­tral level, but lo­cal gov­ern­ments are left to im­ple­ment th­ese poli­cies, while they of­ten do not take into ac­count the ex­ter­nal­i­ties of their poli­cies,” Tan said.

Ex­ter­nal­i­ties are flows based on ef­fects of cer­tain poli­cies, such as en­vi­ron­men­tal degra­da­tion as­so­ci­ated with pro­duc­tion, and econ­o­mists ar­gue they should be taken into ac­count by gov­ern­ments when making eco­nomic poli­cies.

“China’s cen­tral gov­ern­ment needs to man­age the ex­ter­nal­i­ties of growth bet­ter, rather than just set the GDP fig­ure and ex­pect lo­cal gov­ern­ments to fol­low them,” she said.

Mean­while, the growth of China’s econ­omy will be en­cour­aged by its fi­nan­cial mar­ket lib­er­al­iza­tion, and the mile­stone of the ren­minbi be­ing in­cluded in the In­ter­na­tional Mon­e­tary Fund’s spe­cial draw­ing rights bas­ket of cur­ren­cies, a sym­bol of its global re­serve cur­rency sta­tus and an en­cour­ag­ing cat­a­lyst for fur­ther re­form.

Tan said the direct im­pact of the in­clu­sion would be small be­cause the world’s SDR cur­ren­cies amount to a to­tal of only $300 mil­lion, a small fig­ure com­pared with global money cir­cu­la­tion. For ex­am­ple, China’s own for­eign re­serves alone amount to $3.5 tril­lion.

But the fi­nan­cial re­forms of China’s mar­ket, and im­proved cir­cu­la­tion and liq­uid­ity of the ren­minbi, would al­low the ren­minbi to be much more widely used, and this would lead China to de­liv­er­ing its tar­get of cur­rency con­vert­ibil­ity in 2020, Tan said.

Now the ren­minbi is in­cluded in the SDR, “it will be­come a real global re­serve cur­rency and the ac­cess to Chi­nese as­sets will be wider”, she said.

China’s cen­tral gov­ern­ment needs to man­age the ex­ter­nal­i­ties of growth bet­ter, rather than just set the GDP fig­ure and ex­pect lo­cal gov­ern­ments to fol­low them.”

head of the Asia-Pa­cific in­vest­ment of­fice of UBS Wealth Man­age­ment

Con­tact the re­porter at ce­cily. liu@mail.chi­nadai­


Tan Min Lan be­lieves China’s old and newer economies will cre­ate a new sus­tain­able and bal­anced growth model.

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