China Tells

In the last week, the revaluation of RMB has captured the headlines of most big newspaper and magazines. There are various comments on the effects and consequence of the announcement made by PBOC. Some sector got excited by seeing the possibility that China’s consumption sector might be activated through the RMB appreciation.

CHINATELLS doesn’t want to repeat what has been said by most media. What CHINATELLS would like o discuss here, is a more long term and fundamental change in China’s growth model. It is CHINATELLS’ view that China’s GDP is likely to grow at a significantly lower rate in the next 10 years. However it is not necessarily a bad thing for Chinese economy, and the world economy.

The Chinese government has learned a lot through the financial crisis started in 2008. One of the lessons seems to be that China will face more and more pressure from international community regarding its economic growth model (manufacturing + export) and currency (RMB peg to USD). Given the gloomy outlook of world economy in the foreseeable future, such pressure from international peers will only intensify. Therefore China will face a lot of obstacles if the country wants to continue to develop its economy through the existing model, which has delivered superb achievement in the last two decades. To navigate away from the international pressure, one of the keys to push the change is to transfer the investment and exported oriented growth model to domestic consumption lead model.

Such a need is recognized by the top level officials from China government and central bank. In an article written by Li Keqiang published on Qiu Shi (the official magazine), the vice chairman emphasized the importance of changing the structure of the economic growth model (To download the speech of Li Keqiang on Qiu Shi, please click here for a Chinese version). CHINATELLS’ interpretation is that such a publicly published article shows that the top officials in Beijing has reached a consensus on how to shape the development of China’s economy in the next few years on a macro and strategy level.

In fact, there are a few benefits for China to slow down its growth: 1) high growth with low quality brings a huge intangible cost to the society, such as environment pollution, low efficiency in the use of energy resource, and endless friction from trading partners; 2) even China’s growth is slowed down to 6-7% per year, China is still one of the fastest growing engines of the world economy; 3) With a lower growth rate, China doesn’t have to compete teeth to teeth with G7 on resources such as oil and iron ore; 4) a slower growth coupled with a change in structure helps China to be less reliant on world market, which is likely to shrink in the next few years due to the hangover from the financial crisis. On the other hand, to make the structural change of economic growth model happen, the Chinese government probably will have to accept the cost of a slower growth. During the last ten years, the income gap between suburb and urban areas has continued to widen. The labor wage increase has lagged behind the GDP growth, and the household income growth has lagged between the tax collection increase by the government. These factors have decided that the purchasing power of an average Joe on the street is not going to be unleashed overnight by a 0.3% appreciation of RMB. The structural change to promote more domestic consumption, is going to be a lengthy battle between different interest groups in the country, and therefore would be painful for some sectors and potentially bumpy along the road towards the goal.

To summarize, the world need to be prepared for a slower growing China. It is a natural future trend for China under the pressure from both internally and externally. It doesn’t mean that we will head back into recession again. However, the investor’s mindset need to be changed from a blinded bull on China to a more selective basis in terms of spotting investing opportunities.