Prospects for the Chinese economy

EU Trade Commissioners ShanghaiDecember 16, 2008

Mary BoydDirector, Shanghai Corporate NetworkEconomist Intelligence Unitmaryboyd@economist.com

US: 2009 slower than 2008

-1

-0.5

0

0.5

1

1.5

2000

2001

2002

2003

2004

2005

2006

2007

E

2008

F

2009

F

2010

F

-2

-1

0

1

2

3

4

5

6

7

8

Private consumption Residential investment Net trade GDP (RHS)

Contributions to US qoq growth; percentage points. GDP growth is % change qoq, annualised.

China: reality starts to bite

•Slower exports

•Credit squeeze

•Labour issues

•Inflation worries

so…

•Easing the brakes

•Buying one’s way out of trouble

Real GDP growth, %

5.06.07.08.09.0

10.011.012.013.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

China: 2008/9—lower growth, high risks

GDP growth of 9.8% in 2008 (11.9% in 2007)7.5% in 2009

• Spillover effect from global recession• Global credit contraction, China’s credit

quota• Inflation = 6.4% yearly forecast• Fiscal burden• Natural disasters

Cooling measures: stable macroeconomic deceleration was Beijing’s goal - but it is now going for growth

reduce investment in overheated sectors

stimulate domestic consumption levels　 use fiscal transfers, fixed asset investments to redress balance between rich and poor areas (policy)

…while managing economic transition and maintaining stability Olympic year• Industrial upgrade• Global downgrade

Exports sputter, and there’s worse to come

EU US Hong KongJapan ASEAN Other

8.3%

8.3%

17.5%

20.6%

China’s H1 exports by destination

13.6%

Real GDP growth 2008 2009

EU 1.1 -.0.3

US 1.4 -0.4

Japan 0.3 -0.2

Major headaches

•Collapsing stock market

•Knock-on effect of world financial turmoil

•Will consumer spending hold up?

Shanghai Stock Exchange Composite index

1500

2000

2500

3000

3500

4000

4500

5000

China ¥ = US $

• slower US growth will have selective impact on China

• rate of RMB appreciation has picked up, to 9.7% in 2008.

• ¥6.42:US$1 by end-2010

• but still no one-off move

Power shortages

•Masses of new generating capacity

•Pricing policies a major factor in shortages

•2002 = 824 kg. oil per head

•2008 = 1,405 kg. oil per head

•2002 = 1,271 kwh per head

•2008 = 2,471 kwh per head

Wage pressures

•Pro-union push by ACFTU

•Embryonic “collective bargaining”

•More litigious work force

•Demographic pressures

•Importing of cheaper labour

EHS outlook: old problems, new protocols

•New inspection protocols, confidence-building measures

•Major trading partners enlisted for new (harmonized) standards

The agribusiness approach

•Land tenure issues, rural livelihoods

•Food safety concerns

•Food security concerns

Real estate market factors

•Fallout in local property markets, transactions and prices are down

•Consolidation in property sector

•Local municipalities try to keep their markets afloat

•Relief for mortgage holders?

A housing bubble?

Floor Space of Buildings under Construction and Completed by Region 2007

0

50

100

150

200

250

300

Mlilio

n s

q.m

Under Construction

Completed

Labour unrest

• Taxi strikes • Skills shortages

• Paying the price of industrial upgrades

• Moving back home

No more fast lane

Government to the rescue

•Export rebate tax adjustments

•Credit relaxed for SMEs

•Stimulus package

•…But watch the 3 Rs:

Regulations, Raw materials, Renminbi

The stimulus package?

The rise of the welfare state should underpin greater consumption

The 17th CCP Congress: “Harmonious society” policies take effect • Education• Health• Poverty stipends• Subsidized housing• Rapid growth of 2nd and 3rd tier cities and beyond• But saving culture unlikely to be lost overnight

Global reliance on Chinese consumers

•Asset bubble had fed conspicuous consumption

•Will buying habits persist in hard times?

Empty lots

On-line consumption

Consumer resilience?

Top 10 Retail Cities in China 2007

0 5,000 10,000 15,000 20,000 25,000

Guangzhou

Wuxi*

Beijing

Shenzhen

Shanghai

Suzhou*

Hangzhou*

Nanjing

Ningbo*

Wuhan*

Retail per head (RMB)

* Based on household registration

Asset shifting

Rural markets on the move

•“万村千乡市场工程” rural retail policy push

•Revolution in rural finance

•Hypermarkets, supermarkets, mini markets, convenience stores, gas stations expand the rural footprint

Thank you!

谢谢

Mary BoydDirector, Shanghai Corporate NetworkEconomist Intelligence Unitmaryboyd@economist.com