report on China and its urbanisation by MGI Global research states that in 2002, 40% of China’s relatively small urban middle class lived in the four tier-one cities: Beijing, Shanghai, Guangzhou and Shenzhen. By 2022, the share of those megacities will probably fall to about 16% . They will not be shrinking; rather, middle-class growth rates will be far greater in the smaller cities of the north and west. Many are classified as tier-three cities, whose share of China’s upper-middle-class households should reach more than 30% by 2022, up from 15% in 2002. As shown in Exhibit 6, China’s urbanisation is still relatively low. India is the only BRIC country that has a lower level of urbanisation.
Exhibit 6 – Urban population of China and other countries in 2010 (%)
Data: esa.un.org/unup/CD-ROM/Urban-Rural-Population.htm
The median age in China is about 35 years and is only going to rise due to the one child policy. More importantly, its working age population is expected to peak at 996 million or 73% of the population by 2016 and is then expected to decline by 21% between 2016 and 2050.
China’s population has been rapidly aging and its growth will slow as fertility rates go down. According to The Economist, in the past 30 years China’s fertility rate has gone down from 2.6, the rate needed to hold a population steady, to 1.56, which is well below that rate.
The Economist also found that China’s old-age dependency ratio is 11 – roughly half America’s level of 20. But by 2050, China’s old-age ratio will have risen fourfold to 42, surpassing America’s. This accelerated growth in the dependency ratio can again be attributed to the one child policy.
Bloomberg forecasts indicate that unemployment is not expected to grow beyond 4.1%.
These figures help us understand where China is in terms of demographics compared to its nearest economic rival, the United States.
Conclusion
China’s population seems to have peaked and owing to the one child policy it will age more quickly than some of its emerging market peers. China’s biggest challenge will be the creation of a social safety net for an aging population to reduce the burden on its younger generation.
Financial
China deliberately slowed down the expansion of credit in 2011 after the inflationary excesses that followed the stimulus in response to the 2008 recession.
China’s non-performing loan-to-total loan ratio decreased from 2.61 in 2005 to 0.68 in 2012.
The three-month FX volatility increased from 2.51 in 2007 to 3.85 in 2012. Exhibit 7 shows the performance of renminbi/US dollar over the last decade. In 2005, China tweaked the Yuan Dollar peg and the currency has seen a steady rise since then.
Exhibit 7 – Chinese Renminbi/US dollar performance over the last decade
Data: Bloomberg
In 2013 the five-year CDS spread was at 67.85.
At the same time, China’s Fitch Sovereign rating was at A+. Only Chile in Latin America has a better credit rating among emerging markets.
Conclusion
China’s financial position looks pretty solid. However, there is concern about China’s shadow banking system and how that will affect the non-performing loan ratio. No one knows the extent of the problem and bad loans could be the biggest risk going forward.
Trade
In 2011, 124 countries had China as their top trade partner. As a point of comparison, 76 countries have the same relationship with the US. This was almost the exact opposite of what the numbers revealed in 2006 when the 127 countries had the US as their top trade partner versus 70 for China. Clearly China has begun to dominate world trade.
According to Trading Economics, China’s major exports include electromechanical products (57% of total exports), labour-intensive products like clothing, textiles, footwear, furniture, plastic products, bags and toys (20%), and high-tech products (29%).
On the import side, China imports commodities including crude oil, iron ore, copper and aluminum. It also imports a large number of electromechanical products.
The table below shows China’s international trade patterns.
China’s export growth slowed to 7.9% in 2012 versus close to 20% in 2011. This was mainly due to the slowdown in developed markets like the US and Europe. The government set a target of 8% for 2013 even as export prospects remained grim.
China’s trade surplus is expected to shrink with time due to rising imports caused by increased domestic demand. This is not a bad sign as China needs to reduce its dependence on exports and achieve higher growth with increased domestic demand.
It is common knowledge that China’s government puts tariffs in place to protect domestic industry. This behaviour has been inconsistent with WTO rules and a source of frustration for many countries that have had to deal with a cheap Chinese currency and a government that has been looking the other way when it comes to copyright and patent infringement.
Exhibit 8 shows Chinese import and export growth over the last decade. As can be seen, China’s exports and imports have risen concurrently over the last decade. In the future we could see a rise in imports as China moves towards a domestic consumption oriented economy and a decrease in exports as the supply of cheap labour dries up.
Exhibit 8 – Balance of exports and imports
Data: Bloomberg
Unlike countries such as Brazil and Australia, China’s economy does not overly depend on the export of commodities. While China heavily imports from these countries the government has been proactive in diversifying its sources by investing heavily in emerging countries in Latin America, Africa and central Asia.
China’s reserves-to-import ratio is about 20 and is above the regional average of 13.38. This regional average takes into consideration the equivalent ratios in China, Vietnam, South Korea, Thailand, Philippines, India, Indonesia, Singapore and Malaysia.
Conclusion
China has plenty of reserves, a healthy surplus and a growing share of world exports. In the long term imports should grow as the Chinese consumer increases consumption and China’s cost advantage deteriorates compared to other low-cost emerging markets. In order for China to maintain the status quo, it has to manufacture and export goods further up the value chain.
Political stability and governance
China ranks 124th out of 165 countries on the EIU’s political instability index for 2010, with only India ranking better in terms of stability among emerging markets. China’s one-party system contributes to this stability, but it does come at the cost of transparency and openness.
Having said that, recent corruption scandals involving top party leaders like Bo Xilai, and the New York Times expose on Wen Jiaboa’s family wealth, have struck a nerve with the Chinese people who remain frustrated with the unequal distribution of wealth and the privileges enjoyed by the families of top Communist Party officials. China’s new leader Xi Jinping has vowed to make the fight against corruption