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August 31, 2012

China Economic Rebalancing and Goldman's worst case

1. Barron's - Goldman Sachs’ Jim O’Neill, the man who will forever be described as the guy who coined the term BRICs, outlines what a Chinese hard landing would look like if nominal economic growth averaged 7% for the remainder of the decade.

Many others would not consider economic growth of 7% per year a hard landing. It does indicate what Jim O'Neill considers to be his worst case for China from now to 2020.

Here’s is O'Neill's 7% pessimistic outlook: “China’s GDP would still be some $ 13.5 trillion in 2020, and even if the consumer remained stuck at 35% of GDP, it will have increased by another $ 2.1 trillion. To put this in perspective, the total size of India is yet to breach $ 2 trillion,” O’Neill writes.

O’Neill says he finds it “very difficult to see the Chinese consumer representing such a low share of GDP with such low overall nominal GDP growth.” While Chinese economic growth is slowing, weak exports and investment are the primary culprits. Private consumption is already close to 40% of GDP. ”Even in a really persistently weak Chinese nominal GDP scenario, the numbers increase quite a lot, creating plenty of income for some,” O’Neill says.

Anyway, O’Neill argues that in a worse-case scenario the Chinese government is “surely to step in.” That leads him to conclude the Chinese leadership isn’t excessively bothered about what markets necessarily imply.


2. The International Monetary Fund takes a look at how China can boost domestic demand in the Sept. issue of its magazine. The IMF article’s authors say the good news is that China’s consumption is already growing rapidly –just not as fast as GDP.

The good news is that consumption is already growing rapidly in China—a crucial but often overlooked fact. Real final consumption expenditure has increased since 1995 at an average annual pace of about 8½ percent. This is an impressive and enviable record, but it just so happens that real GDP growth averaged an even more striking 10 percent.



China needs to decisively move toward consumption-based growth. This will require progress on the following fronts:

• Boost household income by reducing barriers to entry to labor-intensive service sector jobs; accelerating financial reform to raise returns on savings; and limiting the incentives to pursue capital-intensive growth by raising the cost of capital and reforming energy, water, land, and pollution pricing.

• Improve the social safety net and curb precautionary motives by expanding public health insurance to cover chronic and catastrophic illness, and by strengthening the pension system (especially improving portability).

• Reduce the need to accumulate savings by expanding social housing, improving access to mortgage financing, and tamping down speculative pressures, all to make housing more affordable.

3. Economist- The government has proved uncharacteristically hesitant to revive growth in China. That’s a good sign.

Economic expansion used to trump almost everything else. Keeping the growth rate up was second only to keeping the birth rate down on the list of priorities. But some Chinese policymakers now worry about China’s reliance on investment and about property speculation, which has priced some middle-class families out of big-city markets.

In the past, a Chinese government faced with a nasty downturn would already be repealing property curbs and appealing to state-owned firms to expand capacity. Such a clumsy, conventional response would no doubt revive growth, but would also delay the structural reforms, like financial liberalisation, that the country requires. Policymakers outside China may long for more decisive action. But if hesitation enables China to keep to the path of rebalancing its economy, it will be good news for everyone.

4. Xinhua - As the Chinese economy further slowed in the first half of this year, local authorities in coastal areas, which had once been the country's economic powerhouse, are turning to the sea for new growth amid the economic slowdown, according to plans recently released by local governments.

All local governments in China's eastern and coastal regions, except Shanghai, have unveiled investment plans to develop marine-related projects such as fishing, marine tourism services, shipping and offshore oil and gas exploration to stabilize local economies.

Local governments hope the so-called "marine economy" will contribute to a combined gross domestic product (GDP) of 7.05 trillion yuan (1.11 trillion U.S. dollars) by 2015, a goal much higher than the 4.55 trillion yuan seen in the marine economy last year.

For example, the richest province of Guangdong in southern China has planned 177 major investment projects in marine-related sectors, targeting an economic output of 1.5 trillion yuan by 2015, after its GDP expanded only 7.4 percent in the first half of this year.

Data from the British shipping services company Clarksons Group showed that Chinese shipbuilders received orders to build 182 vessels in the first half of this year and 46 of them failed to produce a single ship last year.

Almost all major coastal cities, including Shanghai, Dalian, Qingdao, Guangzhou, Tianjin, Ningbo and Xiamen, have proposed in their investment plans to develop the marine facilities manufacturing, petrochemicals and steelmaking sectors by 2015

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