Investment spending on Chinese infrastructure has been the main driver behind economic growth in the...
Investment spending on Chinese infrastructure has been the main driver behind economic growth in the country. As this slows and China begins to transform itself into an urban society, the Chinese consumer could become more of a player behind growth in the country.
According to Richard Batley, economist at Schroders, growth has been slowing in China in response to the Chinese government increasing interest rates. Investment spending has slowed from 40% year-on-year to 25% over the past year.
The majority of investment spending has been related to steel mills because this sector has been the main player in the development of the urban centres of China, points out Batley.
Batley says: "The purpose of growth has been part of a wider plan to urbanise the country and increase living standards."
However, Janet Henry, senior global economist at HSBC, believes investment demand is still too strong and she thinks it probable that interest rates will be raised again by a further 25bps. However, it is likely the authorities will not want to be too aggressive about implementing further measures in the coming months, given the likelihood that the world trade cycle will continue to turn down as Fed tightening impinges on consumer demand in the US.
According to Batley, China remains dependent on other countries for its growth because of the absence of significant domestic consumer demand. It is the consumers in Western countries that buy Chinese goods and services and help fuel the growth of China.
Henry believes the positive income effect of rising food prices and reduced agricultural taxes should have a positive impact on consumer spending. She does not think any slowdown from spending in the construction sector will have an impact on urban middle-class dwellers who account for nearly 70% of total consumer spending.
Henry says: "A key structural support to consumption growth in the coming years will come from the privatisation of state-owned assets. Over the past five years, China's extensive housing reform program has transferred more than RMB2.8 trillion in equity from the state to the urban household sector by selling more than 70% of public housing at deep discounts.
"This windfall has not only boosted urban households' net worth by nearly 30%, but has also pushed home ownership rates from about 35% in 1995 to above 70% in many cities in China. As well as stimulating consumption through purchases of household appliances and renovation work, this increasing ownership rate should also enhance ' financial security."
But Henry warns that after the surge in residential construction activity in recent years and more than three years of double-digit house price inflation, there is inevitably a risk that house prices could fall in the next year or two. But the risk of it feeding through into weakness in consumer spending is low.
"The fundamental outlook for the Chinese consumer is positive," he continues. "We expect the ongoing rapid urbanisation process to be associated with strong growth in consumption of a broad range of products ."
Investment spending has slowed because of higher interest rates
Growth in expenditure is mainly related to steel mills for development of urban centres
Rising food prices and reduced agricultural taxes should have a positive impact on consumer spending
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