In our travels to China, we were asking two questions: first, can China sustain a 7% to 7.5% growth rate?
And second, are the problems in the shadow banking system likely to lead to a systemic crisis within the broader context of China’s economy?
And our survey said…
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.
The real support factor in China’s growth going forward is that domestic demand is being driven by higher wage growth. The impact of the one-child policy put in place decades ago is now moving into the working-age demographic.
Around 2000, China crossed a tipping point where it went from an excess capacity of labour to a shortage of labour. And any time one runs into a shortage of something, the price goes up, and what we have seen is a dramatic pickup of wage growth in China. Stronger wage growth is, in turn, providing a core anchor of increased consumption in China, and we think that consumption growth will make up anywhere from two-thirds to three-quarters of China’s total growth.
We think this dynamic should be sustainable and can provide an important foundation for China to be able to achieve a 7% to 7.5% growth rate.
Reform, reform, reform
Investment levels in China will clearly moderate over the course of the next decade or so, in our view, but there is still underlying need for investment. In particular, we think the urbanisation process in China is probably only half complete, and it involves moving tens of millions of people from the rural sector to the urban sector.
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.
We are encouraged that the reforms are improving the quality of growth in China, even albeit at a lower quantity of growth perhaps than in the past.
And lastly, we are very encouraged by the reform agenda. The political reform, the economic reform, by President Xi is potentially going to be one of the most transformational periods of reform since the era of Deng Xiaoping, and President Xi’s efforts to fight corruption and modernize the economy are encouraging.
So far, they seem to be on track to succeed.
