Isabelle Mateos y Lago, Global Macro Investment Strategist at BlackRock, puts China in context, showing how important it has become for the global economy.
China’s debt-driven growth model is starting to reach its limits. Yet the country is also transitioning into a high-tech, more consumer-driven economy. How this economic evolution plays out will have major ramifications for the global economy.
Economic trends, development and policy vary greatly by region, Awareness of this heterogeneity is important to fully grasp the sheer scale of China’s development transformation.
Data from the International Monetary Fund (IMF) shows that China accounted for a quarter of world gross domestic product (GDP) growth over the past 20 years, yet its share of world GDP is smaller than it was two centuries ago, according to the academic Maddison Project.
We see scope for China’s cyclical rebound to strengthen and believe the risk of a debt crisis is limited in the short run.
China’s hunger for global commodities and major pollution problems are well known. But the heft of China’s digital economy is less familiar: e-commerce revenues now make up nearly 50% of the world total, while mobile payments were 50 times those in the US at $5.5 trillion (38 trillion yuan) in 2016, according to China’s iResearch and Forrester Research.
We believe China is taking appropriate steps to become a more services-driven, consumption-based economy. Achieving a smooth hand-off to households and consumers from an industrial-led growth model is never easy. There is a reason why Japan, South Korea and Taiwan are rare examples of economies that avoided the so-called middle-income trap and successfully made the transition to become wealthy and services-oriented. The fall-off in investment has caused Chinese growth to slow and means that consumption holds the key to overall growth going forward.
Greater urbanisation is one of China’s top growth goals, with the aim that nearly 70% of its 1.37 billion population live in urban areas by 2030, compared with 52% in 2010, according to a 2014 World Bank report. This ongoing urbanisation should feature vital reforms: revamping the hukou household registration system to allow a greater rural shift to cities, improving land rights, offering more government pension and health care benefits, and adopting more green technology.
Thus, infrastructure spending will still play a key role driving growth, especially in the less developed central and western regions of the country as part of President Xi Jinping’s One Belt, One Road initiative to boost ties with Eurasia along old Silk Road routes. China can reorient its vast consumer base in unique ways: Bernstein Research highlights an 11-fold surge in hybrid and electric auto sales in three years to nearly half a million by the end of 2016.
From a credit perspective, a shift is under way: some 30% of new lending is going to households, thanks to mortgage demand, 2016 BIS data shows. Urbanisation should play a major role, which is why Premier Li Keqiang has prioritised it. So will taking the next big steps in shoring up a public pension and health system. This should encourage more spending, instead of rainy-day savings that get channelled into unproductive investment.
In the meantime, we are optimistic about China’s near-term growth outlook in what is the year of the Fire Rooster in the Chinese zodiac. We see scope for China’s cyclical rebound to strengthen and believe the risk of a debt crisis is limited in the short run, though there are other near-term risks. A potential trade war with the US could undercut the recovery, while a sharp US dollar appreciation could lead to renewed capital outflows. In addition, risks of temporary credit crunches are rising as China’s central bank has started a targeted policy tightening to curb financial system leverage.
For now, our proprietary GPS gauge is pointing to a positive growth outlook in China, just as supply-side reforms and capacity cuts improve industrial profitability. The improving growth outlook is one reason why we are upbeat on Chinese equities near term as a global trade pick-up reinforces the domestic momentum. The shift to more consumer-led growth opens up opportunities for both domestic companies and global ones tapping into the Chinese market. We see opportunities on the near-term investment horizon, whether in state-owned enterprise (SOE) reform, the booming e-commerce sector or the fast adoption of green technologies to address environmental woes.
Our bottom line: we believe it would be unwise to ignore China’s possibilities given the sheer scale of its tricky transition. The country is undergoing a transformation where the consumer is playing a greater role, supported by an unprecedented rate of urbanisation. For all the risks, we believe the potential within China should not be underestimated.
By Isabelle Mateos y Lago, Global Macro Investment Strategist at Blackrock Investment Institute.