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Ma Weihui: China Is Poised for Economic Restructuring

Like any business owner, bankers cannot assess the present without understanding future trends. You cannot understand China if you know nothing about the world, and you cannot handle micro affairs if you don’t understand the macro environment.

Currently, the deepening European debt crisis remains the biggest threat to the world economy. The debt crisis has worsened during the past two years and is quite different than the sub-prime loan crisis, which erupted in the U.S. in 2008. The European debt crisis is essentially attributable to the bad balance sheets of European nations – financial deficit is mounting, while economic growth is slowing. It may take a long time to iron out the European debt crisis, as it intertwines a wide variety of political, economic, social, and financial problems. Currently, the international community is increasingly concerned about Greece’s default and possible exit from the Eurozone.As a result of trade and economic globalization, the deepening European debt crisis is rippling through to China’s economy. Since the start of this year, China’s exports to Europe have continued to shrink. Following a year-on-year fall of 16.6 percent in July, the August figure slid 12.7 percent from the year-ago period. During the first 8 months of 2012, China’s exports to Europe slipped 4.9 percent compared with 2011. During the first 7 months, Europe’s direct investment in China dropped 2.7 percent. 

As the debt crisis deepens, the European economy is teetering on the cliff of recession. The American economy has recovered moderately since the beginning of this year; however, the U.S. is still grappling with high unemployment, a high deficit, a high debt ratio, and weakening policy stimulus.

Over the same period, China’s economy slowed noticeably with a year-on-year GDP growth rate of 7.8 percent - the first time it’s fallen below 8 percent in three years. This is a combined result of internal and external factors including the European debt crisis and China's macro-control efforts. More importantly, China’s economy is currently in a new stage of transformation amid an economic landscape that has profoundly changed. In particular, China’s four leading economic drivers – large population, globalization, high savings rate, and centrally-controlled economy, which have powered the country’s annual average GDP growth of 9.8 percent over the past 30 years, are losing steam.

First, China’s ample cheap labor resources that have contributed 25 percent of its GDP growth over the past decades are becoming a spent force, as the nation is racing towards the Lewis Turning Point and is facing the challenge of an aging population.

Second, China’s net exports, which have accounted for over 10 percent of its GDP in recent years, are declining cyclically and the benefits of globalization are also beginning to wane as overseas demand weakens.

Third, China’s savings rate has risen 0.44 percent annually since 1978, contributing to 51 percent of its GDP growth in 2011. The rate is expected to fall 1 percent annually from 2016 onwards, crippling the high savings rate driver.

Fourth, China’s supplies of resources, energy, land, and environment are severely depleted, rendering an extensive economic growth model increasingly unviable.

Fifth, the context for reform has changed tremendously compared with the past three institutional reforms in China – the household responsibility system in the 1980s, Deng Xiaoping’s talk during his inspection tour of South China in the early 1990s, and China's accession to the WTO at the beginning of the 21st Century. Currently, China is facing a wide array of tough challenges by deepening its reform drive. 

Amid this background, the Central Government has decided to shift its economic model from growth pace and size to economic structure, quality, productivity, and public welfare, and as such cut the GDP growth target to 7 percent for the 12th Five-Year Plan period. Much like turning a car at high speed, you can only avoid losing control if you hit the brakes.

Although it is difficult for China to sustain double-digit economic growth in the long term, China can retain a rapid growth momentum over the next one or two decades through economic restructuring. This is because China’s economic growth is still driven by the following factors. 

1. Accelerating urbanization. In recent years, China’s urbanization rate has grown over 0.9 percent each year and is currently at 51.27 percent, topping most other countries. Nonetheless, China’s urbanization level stands well below other developing countries, and even trails behind the world’s average. Urbanization is expected to increase 1 percent annually, and plateau at 70 percent in the next 20 years based on global experience.

2. Deepening industrialization. Although investment has expanded rapidly in China over recent years, its capital labor ratio still lags far behind the level in industrialized nations and even below the level in some emerging economies. Moreover, China generates fairly low cumulative fixed capital formation per capita, which represents only 14, 11, 6 and 4 percent respectively of the levels recorded in Taiwan, South Korea, the U.S. and Japan. This signals that China has huge investment growth potential, especially for investment in manufacturing. In addition, China looks set to play a leading role in transforming the global manufacturing model and reshaping the value chain. The shift from ‘Made in China’ to ‘Designed in China’ will drive China’s economy to a sustainable trajectory.
3. Huge consumption potential. Currently, China reports a resident consumption rate of around 35 percent, well below the global average of 61.5 percent and the U.S. level of 70 percent. During the 12th Five-Year Plan period, China’s resident consumption rate will gain over 10 percent thanks to government efforts to revamp the income distribution structure and stimulate consumption, which in turn may boost the total retail sales of consumer goods by 4-5 trillion yuan annually. By 2015, China’s amount of consumption as a share of global spending will climb to 14.1 percent, making China the world’s second largest consumer market after the U.S.

4. Growing regional economies. In recent years, China’s central and western regions have outpaced the east in terms of economic growth, as the government-sponsored ‘Western Development’ and ‘Central Rise’ programs gather momentum. According to data from the National Bureau of Statistics, cumulative GDP growth in the western and central regions exceeded the level in eastern China by 1.4 and 2.5 percent respectively between 2008 and 2011. During the first half of this year, the added value of industrial output and fixed asset investment in enterprises with an annual sales turnover of 2 million yuan in the central region have surpassed the levels in the east of China by 3.0 and 6.0 percent respectively. Over the same period, the western region’s growth rates for the above two indicators were 4.3 and 4.6 percent higher than the figures recorded in the eastern region. Regional economic growth will definitely boost China’s economy.

★ Commodity prices are unlikely to fall.

Despite the slight 2 percent CPI growth in August, China still faces upward pressure in terms of CPI in the near term, as commodity price falls remain an uncertain trend due to the following factors: 1. China has a huge currency reserve. In recent years, especially after the global financial crisis, commercial banks have extended massive loans over the past three years, which, combined with their off-balance-sheet funds, are estimated at a staggering 2.8 trillion yuan. In 2011, China's increased M2 supply accounted for 52 percent of the global supply, and the M2/GDP ratio soared to 181 percent from 160 percent in 2006. 2. External inflationary pressure is rising. Since the beginning of 2011, developed economies including the U.S., Europe and Japan and emerging economies including India and Brazil have relaxed their monetary policies. Currently, global central banks are moving to launch a fresh round of monetary easing, which may trigger another liquidity overflow. 3. China's economy is in the stage of structural growth in terms of resource and labor costs, presenting the challenge of warding off cost-driven inflation.


A trainee from the Dark Horse Training Camp: What’s your position on the trends of the person-to-person (P2P) credit and online loans that have gained in popularity recently? Can you predict the size, limit or market share? 

Ma Weihua: This is inevitably a trend. At the Davos Forum a few days ago, I talked about P2P credit and online credit as part of my forecast on the three trends of future finance. Actually, such loans have been experimented with at home and abroad. Take American Lending Club Inc. as an example. Established in 2007, the company specializes in providing its members with loans on Facebook. By June this year, the company had helped its members lend US$690 million to other members and generated interest income totaling US$60 million. In another example, Ali-loan, founded in 2010, is China’s first small-value credit company to offer loans to online traders. To date, the company has lent a total of 26 billion yuan in loans to more than 129,000 micro enterprises. What makes P2P? The borrower must be duly registered, so we can obtain the necessary information. Then, a bank should step in to assess the risk of lending to the borrower. The U.S. has a credit system in place to do this job. So you can provide loans to a company on short notice without worrying about the lack of collateral. In China, no security deposit is required even for credit cards. But you have to report your workplace, residence, and income. In essence, the credit limit for a credit card is a bank loan. We’ll spread our successful experience in credit cards to the area of micro-enterprises. China’s online credit market is poised to flourish.