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China growth on the mend, helped by urbanization and more investment
By Helen Qiao and Yuande Zhu |
November 23, 2012, Friday
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Print Edition
Print Edition
CHINA'S October data suggested the green shoots have turned into early signs of a growth recovery.
In particular, there is evidence that the destocking process has finally come to an end, especially in the raw material sectors. In our view, this is partly due to the emerging impact of the policy-easing measures adopted earlier, allowing a notable rebound in government-led infrastructure investment. In addition, external demand weakening seemed to have taken a breather, while consumption growth remained resilient.
The nascent signs of a potential growth recovery and the relative tightness in the labor market will likely keep Chinese policy makers away from introducing more policy stimulus. In our view, the government will likely lean more toward "wait and see." As a result, we are not expecting any "silver bullet" in policy easing in the near future.
The most important task of policy makers in China is to promote labor productivity growth without increasing income disparity in the next five years. According to the comments policy makers made in recent years, they have identified urbanization as the key driver to help boost domestic demand and increase competitiveness in industrial and service sectors.
In 2012, the National Development and Reform Commission has allowed more local government investment vehicles (LGIVs) to issue enterprise bonds when LGIV loans are difficult to obtain. Going into 2013, we expect the NDRC to expand the pilot program of local government bond issuance to help support local government funding.
This funding source will be particularly important at a time when commercial banks become more cautious on lending while they wait for the final verdict on the implementation of Basel III regulations starting in 2013.
Urbanization boosts investment in the short term, but ultimately helps consumption. In the near term, infrastructure investment in central and western urban clusters will likely step up, helped by the policy catalyst.
On the other hand, the impetus on consumption from urbanization will likely be released over the next few years. A recent online sales promotion on Singles Day (November 11) showed the rapid growing power of Chinese urban consumers, even relative to their US counterparts on Cyber Monday. As more Chinese join these online shoppers, their spending will likely rise on the back of solid income growth.
More reforms
But urbanization cannot deepen further without the help of more reforms in household registration, land, medical service, education and social welfare. China has gained on average more than 1 percentage point in urbanization ratio each year in the last 10 years, but urbanization still lagged behind industrialization.
Instead of claiming more land for industrial development and compelling farmers to live in cities, the policy makers will need to address property rights, social benefit inequality as well as environment and urban planning issues first.
According to our estimate, China's long-term potential GDP growth level is still above 8 percent in 2012-13.
It implies that for most of 2012, growth has remained below trend, driven by both cyclical and structural factors. In particular, prolonged policy over-tightening has led to destocking and impaired business sentiment, which acted as the key driver to the recent slowdown.
We expect China's GDP growth rate to reach 8.2 percent year-on-year in 2013, on a favorable low-base effect from 2012. In 2014, we expect growth to inch down to 8 percent as policy tightening slows down domestic demand growth to lower inflation, against the backdrop of a stronger global economy.
Helen Qiao and Yuande Zhu are economists at Morgan Stanley. The opinions are their own. Shanghai Daily condensed the article.
In particular, there is evidence that the destocking process has finally come to an end, especially in the raw material sectors. In our view, this is partly due to the emerging impact of the policy-easing measures adopted earlier, allowing a notable rebound in government-led infrastructure investment. In addition, external demand weakening seemed to have taken a breather, while consumption growth remained resilient.
The nascent signs of a potential growth recovery and the relative tightness in the labor market will likely keep Chinese policy makers away from introducing more policy stimulus. In our view, the government will likely lean more toward "wait and see." As a result, we are not expecting any "silver bullet" in policy easing in the near future.
The most important task of policy makers in China is to promote labor productivity growth without increasing income disparity in the next five years. According to the comments policy makers made in recent years, they have identified urbanization as the key driver to help boost domestic demand and increase competitiveness in industrial and service sectors.
In 2012, the National Development and Reform Commission has allowed more local government investment vehicles (LGIVs) to issue enterprise bonds when LGIV loans are difficult to obtain. Going into 2013, we expect the NDRC to expand the pilot program of local government bond issuance to help support local government funding.
This funding source will be particularly important at a time when commercial banks become more cautious on lending while they wait for the final verdict on the implementation of Basel III regulations starting in 2013.
Urbanization boosts investment in the short term, but ultimately helps consumption. In the near term, infrastructure investment in central and western urban clusters will likely step up, helped by the policy catalyst.
On the other hand, the impetus on consumption from urbanization will likely be released over the next few years. A recent online sales promotion on Singles Day (November 11) showed the rapid growing power of Chinese urban consumers, even relative to their US counterparts on Cyber Monday. As more Chinese join these online shoppers, their spending will likely rise on the back of solid income growth.
More reforms
But urbanization cannot deepen further without the help of more reforms in household registration, land, medical service, education and social welfare. China has gained on average more than 1 percentage point in urbanization ratio each year in the last 10 years, but urbanization still lagged behind industrialization.
Instead of claiming more land for industrial development and compelling farmers to live in cities, the policy makers will need to address property rights, social benefit inequality as well as environment and urban planning issues first.
According to our estimate, China's long-term potential GDP growth level is still above 8 percent in 2012-13.
It implies that for most of 2012, growth has remained below trend, driven by both cyclical and structural factors. In particular, prolonged policy over-tightening has led to destocking and impaired business sentiment, which acted as the key driver to the recent slowdown.
We expect China's GDP growth rate to reach 8.2 percent year-on-year in 2013, on a favorable low-base effect from 2012. In 2014, we expect growth to inch down to 8 percent as policy tightening slows down domestic demand growth to lower inflation, against the backdrop of a stronger global economy.
Helen Qiao and Yuande Zhu are economists at Morgan Stanley. The opinions are their own. Shanghai Daily condensed the article.
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