In­vestors ad­just­ing expectations

Mod­ern, dy­namic in­dus­tries are re­plac­ing China’s slow­ing sec­tors to cre­ate a two-speed econ­omy, Ce­cily Liu re­ports.

China Daily (Canada) - - ANALYSIS -

China is now grow­ing as a two-speed econ­omy, with the slower, more tra­di­tional sec­tors making way for newer, dy­namic in­dus­tries.

An­a­lysts say the shift from old to new will help China tran­si­tion from rapid growth to a more sus­tain­able, high-qual­ity growth pat­tern, but it also has big im­pli­ca­tions for for­eign com­pa­nies in­vest­ing in China and for in­dus­tries world­wide.

So which Chi­nese in­dus­tries are slow­ing and which are speed­ing up?

Sim­ply put, heavy in­dus­tries such as coal, ce­ment, glass and steel — the back­bone of China’s eco­nomic growth for decades — are on the slide, while ser­vice-ori­ented in­dus­tries such as health­care, fi­nan­cial ser­vices, tourism and ed­u­ca­tion, as well as those re­lated to the In­ter­net and al­ter­na­tive en­er­gies, are ris­ing.

To put this in con­text, data re­leased in Oc­to­ber by the Na­tional En­ergy Ad­min­is­tra­tion show China’s elec­tric­ity consumption, which is most af­fected by heavy in­dus­try, has grown just 0.3 per­cent year-onyear, which in­di­cates the old GDP driv­ers are nearly, if not al­ready, in re­ces­sion.

By con­trast, the lat­est China in­dex com­piled by re­search com­pany MSCI sug­gests newer in­dus­tries are be­com­ing true growth driv­ers. The in­dex, cov­er­ing about 85 per­cent of China’s eq­uity uni­verse, in­clud­ing large and mid-cap stocks, puts the coun­try’s growth at 5 per­cent. Yet if we dis­count the data for the bank­ing sec­tor (old and dom­i­nated by State-owned en­ter­prises) and the en­ergy sec­tor (strongly linked with tra­di­tional, heavy in­dus­tries) then the rate rises to 25 per­cent.

Yet ex­perts say for­eign in­vestors in China need to rec­og­nize th­ese vary­ing speeds of growth to form re­al­is­tic expectations. While China’s grow­ing consumption may be pro­vid­ing a large mar­ket for ser­vice-ori­ented com­pa­nies, coun­tries that rely on ex­ports of com­modi­ties to China for growth may need to fun­da­men­tally ad­just their long-term strate­gies.

“Of­ten when Western firms look at China’s econ­omy, they im­me­di­ately think of the man­u­fac­tur­ing in­dus­try, which is slow­ing down, but that is not the whole story be­cause now ser­vice in­dus­tries ac­count for about 50 per­cent of China’s econ­omy,” said Hui Tai, chief mar­ket strate­gist in Asia for JP Mor­gan As­set Man­age­ment.

Man­u­fac­tur­ing is slow­ing, but it is also find­ing new ways to grow, he said. For ex­am­ple, the in­dus­try is in­creas­ing its use of big data, the In­ter­net, au­to­ma­tion and tech­nol­ogy. Mean­while, many new in­dus­tries are emerg­ing, and Hui pre­dicted their share of China’s eco­nomic growth will be­come more im­por­tant.

“The re­bal­anc­ing of China’s econ­omy has had larger im­pli­ca­tions than pre­vi­ously thought on the global econ­omy,” said Robert Bergqvist, chief econ­o­mist for SEB bank in Swe­den. “Ap­par­ently, the su­per cy­cle for com­modi­ties and en­ergy seems to have come to an end, and world trade vol­ume is now mov­ing side­ways.

“The world has be­come aware of China’s im­por­tance for the global econ­omy, and China’s eco­nomic and fi­nan­cial chal­lenges are shared by all coun­tries around the globe, right now es­pe­cially by many com­mod­ityand en­ergy-in­ten­sive ex­porters.”

The two-speed struc­ture im­plies slower av­er­age GDP growth in China over­all. This year, dur­ing high-level dis­cus­sions on China’s 13th Five-Year Plan, the na­tion’s blueprint for growth be­tween 2016 and 2020 that will be fi­nal­ized in March, the gov­ern­ment said it had a tar­get to dou­ble GDP be­tween 2010 and 2020. This would re­quire grow­ing the econ­omy by an an­nual av­er­age of 6.5 per­cent over the next five years.

This rate sig­ni­fies a ma­jor slow­down from the rapid growth that the coun­try ex­pe­ri­enced over the past three decades, but it points to a more sus­tain­able long-term growth model.

“China is re­duc­ing its GDP growth rate pro­jec­tions be­cause it is re­al­iz­ing that a man­u­fac­tur­ing-driven model is not sus­tain­able, es­pe­cially con­sid­er­ing the ad­verse im­pact it has on the en­vi­ron­ment,” said Kerry Brown, a pro­fes­sor of Chi­nese stud­ies and di­rec­tor of the Lau China In­sti­tute at King’s Col­lege, Lon­don.

“The coun­try is in a process of tran­si­tion­ing into a more­di­verse econ­omy with big­ger ser­vice and fi­nan­cial sec­tors. But as th­ese sec­tors take time to build, China needs to ac­cept a slower growth rate in the tran­si­tion­ing process.”

The two-speed econ­omy is a re­al­ity of that process, ac­cord­ing to Fang Jian, man­ag­ing part­ner in China for Lin­klaters, the Lon­don-based law firm.

“There will be in­dus­tries that will be­come less com­pet­i­tive in this en­vi­ron­ment, so the chal­lenge is main­tain­ing sta­bil­ity and man­ag­ing change to min­i­mize eco­nomic dis­rup­tion,” he said. “This will be achieved by equip­ping the work­force of tomorrow with the skills and ed­u­ca­tion to keep pace with tech­no­log­i­cal change. As China moves its reliance in GDP growth from in­fra­struc­ture in­vest­ment and ex­ports to consumption, the high growth of its new econ­omy will be crit­i­cal.”

One big ad­van­tage of the two-speed econ­omy is its abil­ity to help China avoid the so­called mid­dle-in­come trap, said Robert Davis, a se­nior port­fo­lio man­ager at NN In­vest­ment Part­ners, for­merly ING In­vest­ment Man­age­ment.

The mid­dle-in­come trap is when a de­vel­op­ing econ­omy starts to lose its low-cost la­bor com­pet­i­tive­ness but does not have the tech­nol­ogy to com­pete with ad­vanced coun­tries.

For ex­am­ple, newly in­dus­tri­al­ized coun­tries such as South Africa and Brazil have not, for decades, left what the World Bank de­fines as the mid­dlein­come range. They suf­fer from low in­vest­ment, slow growth in sec­ondary in­dus­tries, lim­ited in­dus­trial di­ver­si­fi­ca­tion and poor la­bor-mar­ket con­di­tions.

“China’s re­bal­anc­ing pro­gram is in­tended pre­cisely to move across this gap and avoid the trap,” Davis said. “The dif­fi­culty is that re­forms are usu­ally needed to al­low for pro­duc­tiv­ity growth and in­no­va­tion de­vel­op­ment’’ that are needed for this to hap­pen.

Un­like South Africa and Brazil, China’s two-speed growth model is driv­ing in­vest­ment into ser­vices and high-tech in­dus­tries, while making its man­u­fac­tur­ing in­dus­try more high-tech. 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. The PMI is an indi­ca­tor of busi­ness ac­tiv­ity based on sur­veys mea­sur­ing per­cep­tions of key busi­ness vari­ables.

In ad­di­tion, many of China’s other eco­nomic in­di­ca­tors also paint an op­ti­mistic pic­ture. For ex­am­ple, the re­tail sec­tor is reg­is­ter­ing 11 per­cent yearon-year growth, ac­cord­ing to of­fi­cial data.

The man­u­fac­tur­ing sec­tor has been vi­tal to China since the gov­ern­ment started the process of re­form and open­ing-up in the late 1970s, which led to an ex­port-driven boom. Dur­ing this time, China made good use of its low-cost la­bor sup­ply and its do­mes­tic pro­duc­tion’s econ­omy of scale to man­u­fac­ture low-end prod­ucts. This model of growth co­in­cided with the debt-fu­eled de­mand for goods by many Western coun­tries.

Jan Dehn, head of re­search at Ash­more, an emerg­ing-mar­kets in­vest­ment man­age­ment com­pany in Lon­don, said this model was suc­cess­ful be­tween 1980 and 2008, but af­ter the fi­nan­cial cri­sis its ba­sis dis­ap­peared due to weak­ened de­mand from Western coun­tries, the ap­pre­ci­a­tion of the ren­minbi and ris­ing la­bor costs.

To find new ways to grow the econ­omy, he said, China should rely more on do­mes­tic consumption, which the coun­try can re­al­is­ti­cally achieve be­cause its sav­ings rates are al­most 50 per­cent. Also, its ex­porters must in­crease pro­duc­tiv­ity, so that they can con­tinue to be com­pet­i­tive de­spite a stronger cur­rency over the medium term and ris­ing la­bor costs at home.

Con­tact the writer at ce­cily. liu@mail.chi­nadai­


A woman makes a dig­i­tal pay­ment at a su­per­mar­ket in Shang­hai on Dec 12. Con­sumer spend­ing and the ser­vices sec­tor are in­creas­ingly driv­ing growth.


A worker checks the gears of a ma­chine in a fac­tory in Dalian, Liaon­ing prov­ince, in De­cem­ber. China’s man­u­fac­tur­ing in­dus­try is turn­ing to in­no­va­tion to main­tain its com­pet­i­tive edge.

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