By Alla Harmsworth, strategist, Nikko AM
The story of China’s transformation into a global economic superpower is as remarkable as it is well-documented. Based on IMF figures, in 1983 the Chinese economy accounted for less than 3% of global GDP, similar to that of India. By 2010, China accounted for 13%, making it the world’s second largest economy, while India – Asia’s other emerging economic power – was closer to 5%. Chinese share of global GDP has risen at an accelerating pace and according to some forecasts, China could overtake the US as the world’s largest economy as early as by end-2016.
China now accounts for almost 10% of global net exports – up from less than 1% at the beginning of its reform process. The scale and duration of China’s expansion is now of a different order of magnitude than that of other Asian success stories, including Japan. The China story is far from done. Although we expect the pace of growth to moderate as the economy matures and undergoes transition to higher quality, more consumption-led growth, economic momentum remains strong and the authorities’ efforts to rebalance growth are proving a success. The residential housing market is firmly underpinned by urbanisation, with supply over the last decade well below the increased level of demand: McKinsey predicts that by 2020, 60% of the total population – some 850 million people – will be living in urban areas, providing powerful consumer- driven impetus for growth. Wealth is increasing steadily – Credit Suisse estimates China’s total household wealth at $20trn in 2012 and forecasts it to rise to $35trn by 2017 making China the second wealthiest country in the world in terms of household assets after the US. Increasing private wealth, low unemployment, a growing social security net and emergence of a younger generation of consumers should increase the share of private consumption as a percentage of GDP in coming years. McKinsey predicts that by 2020 Chinese GDP will account for 19% of world economic output. Despite expectations of growth moderating to a more sustainable annual pace of 7-8%, the likelihood of a hard landing is low. Many economists have revised growth forecasts upwards, with a few expecting growth of just below 9% in Q4 2012, driven by stronger infrastructure and housing. Inflation bottoming out and growth indicators picking up are important for the resumption of renminbi (RMB) appreciation over the next six to 12 months, with the government likely to take a more relaxed stance on the currency if there is further confirmation that the economy is bottoming out. Additionally, their net capital outflows of the past three quarters are stabilising, partly from the fall in global risk premium resulting from recent ECB and the Fed policy announcements , which are helping reduce expectations of depreciation. Longer term, there is fundamental economic support for the currency, and the RMB should continue to appreciate over the next five to 10 years, albeit at a slower and possibly more volatile pace as China’s trading imbalances with the rest of the world continue to unwind. The extent of the currency’s undervaluation may have diminished, but there is little doubt that the currency is still below its fair value China offers superior growth prospects and a healthy fiscal position which are likely to continue to attract international capital.
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