Andrew Graham, manager of the Martin Currie Pacific trust, examines how China’s leaders are addressing the key issues facing the country and where the best investment opportunities lie.
This week marked the beginning of the Chinese Year of the Snake, and with the superpower’s once-a-decade leadership transition due to complete next month, it seems like an opportune moment to consider the economic landscape facing the world’s most populous nation.
It is now widely appreciated that an extraordinary economic history has been created in China since the early 1980s.
According to the World Bank, real GDP growth of over 10% per annum has lifted more than 500 million people out of poverty as the country has transformed into the world’s largest production base and its second-biggest economy.
Demographics, namely a surge in the number of young workers between 1970 and the late 1990s, also worked in the country’s favour, as did improvements in labour productivity. But what does the future hold? China’s demographic trends are beginning to turn – and not for the better.
According to United Nations estimates, the country’s working-age population will decline in 2016–20.
Age dependency – the ratio of people under 15 and over 64 to those in between – will also start to rise.
Typically, GDP growth decelerates as economies approach this turning point in their demographic profile (witness Japan and Korea). With slowing labour inputs, increasing productivity will be the key to sustaining growth. Therein lies another challenge: after accelerating through the 1980s and 1990s, growth in labour productivity appears to have peaked.
Post the financial crisis, global demand has been weak, particularly in developed markets.
This presents an obstacle to the traditional emerging market growth model, in which capital is ploughed into the manufacturing sector to fuel export growth.
China responded by supporting the domestic economy via higher investment. The primary channel for this was the banking system, through an aggressive increase in credit.
If sustaining economic growth was the main goal, the strategy can be judged a success: growth has indeed remained at levels Western governments can only dream of.
However, given the speed and scale of this surge in investment, capital productivity and corporate profitability have suffered. Concerns have arisen, too, over asset quality in the financial system.
Thanks to low consumer and central government borrowing, China still ranks favourably relative to major developed economies in terms of debt to GDP, but the flood of investment since 2008 has been accompanied by substantial corporate borrowing.
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