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Robust growth likely in the Year of Tiger
January 11, 2010, Monday
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AFTER a tough grind through the Year of the Ox, it's easy to see why China is looking forward to the beginning of the Year of the Tiger in February.
Thanks in large part to the government's ability to keep the world's third-largest economy moving over the past 12 months with a massive 4 trillion yuan (US$585 billion) stimulus program, many analysts expect robust growth in the year ahead.
"With a larger than expected impact from the stimulus, China's GDP growth target, which seemed difficult to attain early in 2009, is now in the bag," wrote Louis Kuijs of the World Bank in a blog shortly after the government announced that real GDP growth rose to 8.9 percent year on year in the third quarter.
What's not as clear is where the economy goes from here. In fact, sustaining growth now could be even more challenging than revving it up during the downturn.
The key, say experts from the World Bank, Wharton and elsewhere, is for China to make a break with past expansionary policies and rebalance the economy in a way that reduces the country's overreliance on exports and manufacturing while increasing its focus on private consumption.
If the past is anything to go by, getting China's consumers to spend is easier said than done.
As a report from research firm Euromonitor International notes, in US dollar terms, China's consumer market lags behind those of the US, Japan and much of Europe, with private consumption just over one third of GDP in 2008.
China is a country of savers: the average Chinese household saved 31.6 percent of its disposable income in 2008 - nearly 10 times the 3.4 percent savings rate for US households. But that is changing, though slowly, says Euromonitor.
It certainly helps that consumer confidence in China is more robust than it has been in a long time. A survey by The Nielsen Company found that consumer confidence in China in the third quarter of 2009 reached its highest level since mid-2007, particularly among individuals living in the country's tier-two cities.
Even rural Chinese - hard-hit by factory closures in 2009 and left behind economically as urban China has prospered - are feeling fairly confident.
Strong demand
Strong domestic demand has buoyed import volumes, and the current account surplus may fall from 10 percent in 2008 to 5.5 percent of GDP in 2009 and 4 percent in 2010, even with import prices down sharply, the World Bank reports.
In addition, China's manufacturing expanded at the fastest pace in 20 months in late December, according to a report from Bloomberg, citing a manufacturing index released regularly by the Beijing-based National Bureau of Statistics and the Federation of Logistics and Purchasing.
In a similar vein, a report published in late 2009 by Barclays Capital estimates that Chinese manufacturing output has risen more than 30 percent since January 2008, while that of Japan, Europe and the US declined more than 10 percent.
Foreign companies are benefiting from the reinvigorated domestic economy and growing consumer confidence. For proof, look no further than the humble TV.
While the rural stimulus program encouraging consumers to buy old-fashioned cathode ray tube television sets backfired because of low traction, sales of flat-screen TVs - both local and foreign made - have been booming.
Samsung Electronics, a South Korean company with extensive operations in China, posted a record 29 percent rise in sales in the third quarter of 2009, which its executives ascribe partly to China's growing consumer electronics market.
From TVs to luxury goods, the one enticing segment of the consumer market that both foreign and local companies will continue to target heavily is the country's younger generation.
Old versus young
Although the older generation saves up to 60 percent of their income, a CMR (China Market Research) survey of 5,000 consumers ranging from 18 to 32 years old found that very few are saving. "They're just so optimistic about their futures," says Shaun Rein, CMR president.
The optimism may be warranted. As the country's growth gets back on track, GDP per capita is expected to be US$4,000 this year, up from US$3,000 in 2008 and just US$800 10 years ago, according to government statistics.
But that is only part of the story, some analysts note: statisticians rely on reported income - a number that is often considerably less than what people take home, since government figures don't include such benefits as company cars and under-the-table earnings.
However, even among China's younger big-spenders, a number of factors could dampen consumption in 2010.
One of them is youth unemployment, particularly among university graduates - 16 percent of whom were unemployed as of last month, according to government statistics.
Another factor that could give consumers the jitters is the real estate sector. Many believe that the sector is a bubble. Interest rate cuts and lower deposit requirements were among the measures introduced by the government over the past year to stimulate the domestic property market. The excessive easing of credit has a lot to do with the sector's growth.
(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharon.com.cn. Trustees of the University of Pennsylvania. All rights reserved. The views expressed are its own. Shanghai Daily condensed the article.)
Thanks in large part to the government's ability to keep the world's third-largest economy moving over the past 12 months with a massive 4 trillion yuan (US$585 billion) stimulus program, many analysts expect robust growth in the year ahead.
"With a larger than expected impact from the stimulus, China's GDP growth target, which seemed difficult to attain early in 2009, is now in the bag," wrote Louis Kuijs of the World Bank in a blog shortly after the government announced that real GDP growth rose to 8.9 percent year on year in the third quarter.
What's not as clear is where the economy goes from here. In fact, sustaining growth now could be even more challenging than revving it up during the downturn.
The key, say experts from the World Bank, Wharton and elsewhere, is for China to make a break with past expansionary policies and rebalance the economy in a way that reduces the country's overreliance on exports and manufacturing while increasing its focus on private consumption.
If the past is anything to go by, getting China's consumers to spend is easier said than done.
As a report from research firm Euromonitor International notes, in US dollar terms, China's consumer market lags behind those of the US, Japan and much of Europe, with private consumption just over one third of GDP in 2008.
China is a country of savers: the average Chinese household saved 31.6 percent of its disposable income in 2008 - nearly 10 times the 3.4 percent savings rate for US households. But that is changing, though slowly, says Euromonitor.
It certainly helps that consumer confidence in China is more robust than it has been in a long time. A survey by The Nielsen Company found that consumer confidence in China in the third quarter of 2009 reached its highest level since mid-2007, particularly among individuals living in the country's tier-two cities.
Even rural Chinese - hard-hit by factory closures in 2009 and left behind economically as urban China has prospered - are feeling fairly confident.
Strong demand
Strong domestic demand has buoyed import volumes, and the current account surplus may fall from 10 percent in 2008 to 5.5 percent of GDP in 2009 and 4 percent in 2010, even with import prices down sharply, the World Bank reports.
In addition, China's manufacturing expanded at the fastest pace in 20 months in late December, according to a report from Bloomberg, citing a manufacturing index released regularly by the Beijing-based National Bureau of Statistics and the Federation of Logistics and Purchasing.
In a similar vein, a report published in late 2009 by Barclays Capital estimates that Chinese manufacturing output has risen more than 30 percent since January 2008, while that of Japan, Europe and the US declined more than 10 percent.
Foreign companies are benefiting from the reinvigorated domestic economy and growing consumer confidence. For proof, look no further than the humble TV.
While the rural stimulus program encouraging consumers to buy old-fashioned cathode ray tube television sets backfired because of low traction, sales of flat-screen TVs - both local and foreign made - have been booming.
Samsung Electronics, a South Korean company with extensive operations in China, posted a record 29 percent rise in sales in the third quarter of 2009, which its executives ascribe partly to China's growing consumer electronics market.
From TVs to luxury goods, the one enticing segment of the consumer market that both foreign and local companies will continue to target heavily is the country's younger generation.
Old versus young
Although the older generation saves up to 60 percent of their income, a CMR (China Market Research) survey of 5,000 consumers ranging from 18 to 32 years old found that very few are saving. "They're just so optimistic about their futures," says Shaun Rein, CMR president.
The optimism may be warranted. As the country's growth gets back on track, GDP per capita is expected to be US$4,000 this year, up from US$3,000 in 2008 and just US$800 10 years ago, according to government statistics.
But that is only part of the story, some analysts note: statisticians rely on reported income - a number that is often considerably less than what people take home, since government figures don't include such benefits as company cars and under-the-table earnings.
However, even among China's younger big-spenders, a number of factors could dampen consumption in 2010.
One of them is youth unemployment, particularly among university graduates - 16 percent of whom were unemployed as of last month, according to government statistics.
Another factor that could give consumers the jitters is the real estate sector. Many believe that the sector is a bubble. Interest rate cuts and lower deposit requirements were among the measures introduced by the government over the past year to stimulate the domestic property market. The excessive easing of credit has a lot to do with the sector's growth.
(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharon.com.cn. Trustees of the University of Pennsylvania. All rights reserved. The views expressed are its own. Shanghai Daily condensed the article.)
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