The two illustrations above show the subway map for Chengdu, China’s fourth most populous city and Tokyo, Japan, respectively. They also illustrate just how much investment is still needed in China.
In a recent outlook paper produced by Franklin Templeton’s Fixed Income Group, executive vice president and CIO, global bonds, Michael Hasenstab, points out that while investment levels in China will clearly settle over the course of the next decade or so, there is still an underlying need for investment. In particular, he believes the urbanisation process in China, which will involve moving tens of millions of people from the rural sector to the urban sector, is only halfway complete. Recent growth estimates coming from China have pointed toward deceleration this year. Hasenstab, however, says there’s a big difference between deceleration in growth in and of itself, and a moderation in growth based on a healthy dynamic of better quality of growth. So can China sustain a 7% to 7.5% growth rate? Hasenstab seems to think so. “We came away reaffirming our view that China can, indeed, maintain a 7% to 7.5% growth rate, and while issues in certain sectors of the Chinese banking system are problematic, the scale of those relative to the entire economy appears quite manageable,” he says. “President Xi Jinping’s recent reforms have facilitated that mobilisation of labour, which is going to require a tremendous amount of investment, in everything from schools to sewage to water purification to subway systems to housing. That investment, we believe, will support China’s growth.”
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