China incomes growing and more urbanization to support growth

Frank Holmes, Chief Investment Officer of U.S. Global Investors, makes a bullish case for China.

The key to China’s economic growth isn’t “how fast?” or “how much?” The most critical question is “what’s driving it?”

Strong income growth has triggered a rise in domestic consumption. CLSA says inflation-adjusted wages in urban areas rose 7.8 percent in 2010 and have risen another 7.6 percent during the first half of 2011. As a result, urban retail sales and household expenditures increased 17.4 percent and 12 percent during the second quarter of 2011, respectively. In addition, rising migrant wages and higher farm-gate prices have led to a 13.7 percent increase in real rural incomes and 16.8 percent increase in rural retail sales during the first half of 2011, CLSA says.

GaveKal Research says “Hundreds of once-empty districts across the country, from Shangdi in northwest Beijing to Donghu in southeast Wuhan, have turned into flourishing neighborhoods.” According to GaveKal’s research, China’s cities absorb 20 million new people each year, creating a current shortfall of 75 million housing units. They estimate 40-50 million new urban households will need to be constructed by 2020 in order to meet demand. The chart on the left illustrates that a large portion of China’s urban growth will take place in suburbs as cities with 1 million people or less experiencing the most growth.

GaveKal’s research estimates that between 33 and 40 percent of China’s workforce is currently employed in the agriculture sector. As more of China’s workforce shifts to more modern jobs, their productivity and incomes increase. GaveKal says this means the country is “far from exhausting the economic gains of shifting its workforce to more productive activities.”

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