an astounding ten times over the last 20 years. In 2012, China’s GDP per capita on a PPP basis was $10,011 (see Exhibit 1).
Exhibit 1 – GDP per capita PPP adjusted (US$)
Data: Bloomberg, IMF Projections
Special Note: This chart is also produced for all the other countries covered in this book and is based on a Purchasing Power Parity basis from IMF (International Monetary Fund) data. For a definition of PPP please refer to Chapter 3.
According to Bloomberg, China’s reserves have risen by 721% from 2004 through 2012. In comparison the combined total reserves among the rest of the BRICs rose about 400% to $1.1 trillion. As of 2012 China sits on $3.3 trillion of reserves, which is enough to buy every central bank’s official gold supply twice over.
The Economist Intelligence Unit expects consumer prices to rise by 3.7% a year on average in the period 2013 to 2017, partly owing to the fact that a falling working-age population will help to push up wages rapidly. The authorities are expected to allow the renminbi to appreciate modestly against the US dollar, even when there are going to be fervent attempts by the West to demand much faster appreciation of Chinese currency. So far the Chinese have marched to their own drum and resisted political pressures to revalue the renminbi to a level greater than what is domestically palatable. Its current account is likely to move to deficit from 2017 as import growth outstrips export expansion.
The average rate of inflation in China was 4.3% from 1994 to 2010 (see Exhibit 2). The exhibit shows how inflation peaked in 1997 and then retreated due to withdrawal of foreign capital during the Asian financial crisis. We then see inflation going up with the massive investment that the Chinese government pushed at the beginning of the millennium.
The Chinese government is focused on keeping inflation below 4%, with a 5% inflation rate considered excessive. The official target for 2013 is 3.5% and economists predict rising inflation for 2013. Some of the factors causing inflation have been the massive stimulus that came in 2009 in response to the recession and also wage inflation due to a tighter labour supply as a result of changing demographics.
Exhibit 2 – Year-on-year change in CPI
Data: Bloomberg
China has grown at an average of 10% over the last ten years. As China’s per capita GDP grows and it reaches the middle income trap, growth is expected to slow down to closer to 5% to 6% .According to the Economist Intelligence Unit, real GDP growth will average 7% a year in the period 2013 to 2017, with economic expansion decelerating gradually over the period. The government will persist, with what is expected to be some success, in its attempts to redirect the economy towards private consumption and away from its excessive reliance on investment.
Using data from HIS insight, the McKinsey Global Institute’s analysis (see Exhibit 3) shows that as economies become wealthier and reach middle-income status, manufacturing’s share of GDP peaks (at about 20% to 35% of GDP). Beyond that point, consumption shifts toward services, hiring in services outpaces job creation in manufacturing, and manufacturing’s share of GDP begins to fall along an inverted U-curve.
The report further states that employment follows a similar pattern: manufacturing’s share of US employment declined from 25% in 1950 to 9% in 2008. In Germany, manufacturing jobs fell from 35% of employment in 1970 to 18% in 2008, and South Korean manufacturing dropped from 28% of employment in 1989 to 17% in 2008.
The MGI report also suggests that as economies mature, manufacturing becomes more important for other attributes, such as the ability to drive growth in productivity, innovation and trade. Manufacturing also plays a critical role in tackling societal challenges, such as reducing energy and resource consumption and limiting greenhouse gas emissions.
Exhibit 3 – Top 15 manufacturers by share of global manufacturing – large developing economies are increasing their share
Data: HIS Global Insight, McKinsey Institute analysis
Between 2007 and 2011 China ramped up its investment as a percentage of GDP to close to 50% to counteract the effects of the global financial crisis. By 2011, this investment had reached an all-time high of 49.2% (see Exhibit 4). Between 2002 and 2011 fixed investment grew by 13.5% a year. Much of this investment went to infrastructure and real estate as opposed to consumption. Typically a high investment-to-GDP ratio is a good thing, but China might have over extended itself on this front by creating excess capacity, thus sowing the seeds of a potential real estate bubble.
Exhibit 4 – Investment as a percentage of GDP
Data: Bloomberg, IMF Projections
Rising employee costs, land costs and currency appreciation have diminished China’s attractiveness as a FDI destination. Total FDI into China was $112 billion in 2012, 3.7% lower than 2011. Investors are looking to other relatively cheaper markets like Vietnam and Indonesia.
China’s debt-to-GDP has been rising rapidly as it has implemented its massive stimulus package post-2008. As of March 2012, China had a record $2.78 trillion of debt – this amounted to 43% of GDP. However China does not have large amounts of external debt that could spark a payments crisis and most of its debt has funded infrastructure projects, which will bring future benefits. Even so, an upward trend in the debt-to-GDP ratio is a cause of concern when it is not accompanied by a strong economic growth rate. Exhibit 5 charts China’s debt as a percentage of GDP over time.
Exhibit 5 – Debt as a percentage of GDP
Data: Bloomberg
As of September 2012, China’s external debt stood at $771 billion, down from $785 billion in June 2012. In spite of the down trend highlighted by these figures, China’s foreign debt has been steadily increasing over the last few years.
The new generation of Chinese leaders that took over in 2012 is now shifting focus from reliance on exports and big infrastructure projects to increasing social spending in areas like healthcare. The intent is to free up money for households to increase their spending. Traditionally the Chinese consumer has saved more and consumed less. According to the FT, Chinese consumption makes up only 48% of its GDP, much lower than the worldwide rate of 80% and ironically lower than its own level of 60% about 20 years ago.
Conclusion
Recent evidence points to a slowing down of the Chinese economy and the days of 10% year-on-year growth might soon be a thing of the past. On the fiscal side China’s finances still look stronger than any other emerging economy and it could easily cushion a hard landing. China’s biggest challenge in the future will be to create enough jobs to prevent social unrest and manage the consequences of unproductive investments it has made in the last few years.
Demographics
The current rate of urbanisation is in the range 45% to 51%, which is far from saturation compared to other developed countries. According to Reuters, China plans to spend $6.4 trillion over the next decade to bring 400 million people into cities. The government hopes that 60% of the population of almost 1.4 billion will be urban residents by 2020 and it plans to build homes, roads, hospitals and schools for them. Urbanisation is a policy priority for the Chinese government, as it wants to unlock the next level of growth