The production of low-end goods like textiles, toys, clothes and furniture is slowing, and Chinese firms’ profit margins (already very low) are suffering from softer exports, rising direct and indirect costs plus the yuan’s strength. We have always argued that slower Chinese growth would have microeconomic rather than macroeconomic causes, and we are sticking with that view.” (FactSet Research – The outlook for Chinese growth - October 28, 2008)
Authors of the Factset Research economic strategy paper “The outlook for Chinese growth,” Jean Luc Buchalet and Pierre Sabatier contend that the last 5 consecutive years of double digit GDP growth in China is a result of cheap labour. However, now that wages are rising, at an incredible rate of 14%-20% annually, depending on the region, that period is over. According to official figures, wages climbed from an annual average 700 yuan in 2002 to 1,400 yuan in 2007. On a comparative basis, labour costs on the Fujian and Guangdong coasts are twice as high as they are in Vietnam. Buchalet and Sabatier go on to say that “China’s wage inflation is not only a response to rapid growth. It also has structural causes, such as domestic economic rigidities, and in the next decade or so the single-child policy will mean lower labour force growth. China will become an old country before it becomes a developed one.”
Buchalet and Sabatier also note that issues relating to healthcare, education and pensions are going to become serious priorities for the government in the years to come. The proportion of people aged 60 or more being assisted from some form of pension is only an estimated 30%, and furthermore only 10% of this age group has health insurance. Buchalet and Sabatier contend that the spending required to increase these proportions is substantial and changes in demographics will only complicate matters further. With the proportion of people aged 60 or more forecasted to rise 5x faster than population as a whole between now and 2020, this will result in the dependency ratio dropping from 5 to 1 now to 2 to 1 by 2050. Therefore, from this standpoint, a household savings rate of 25% (of disposable income) is understandable since families still have to provide for much of their own health, retirement and education costs.
In response to economists who believe that China is sufficiently mature to drive its growth with domestic demand rather than exports, Buchalet and Sabatier reply by saying “that domestic consumption had very little to do with China’s recent growth and still accounts for only 36% of GDP, down from 45% in 1998 and compared with 71% in the USA. Moreover, the 70% drop in local share prices since October 2007 (which has cut household wealth by over $2,000bn) and the 25-40% correction in property prices along the Chinese seaboard do not suggest an imminent explosion in household spending.” Buchalet and Sabatier note that despite its population, China’s GDP only accounts for 11.4% of the world total in PPP terms, compared with 20.7% for the USA and 22.2% for the European Union.
Buchalet and Sabatier believe that Chinese growth is highly dependent on foreign direct investment and exports. Furthermore, recent structural changes have actually increased the country’s exposure to recession in developed countries. “95% of exports are manufactured goods, and China is the world’s biggest industrial power, with around 25% of global production (PPP basis). As about 80% of the output of China’s factories is destined for foreign buyers, it is hard to see how export sales will be unaffected by the marked deceleration in OECD countries. The latest figures confirm our fears, with annual industrial production growth slowing from 18% in 2007 to 11.4% in September. Similar reversals are evident in electricity production, construction and cement output.”
Buchalet and Sabatier forecast that in current context of slower international economic activity and local stock market and property market corrections, Chinese GDP should grow at around 7% in 2009, with a probability of 70%. They also note that there is a 30% probability of 6% growth.
Source: FactSet Research
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