China: 2013 Outlook
Comment of the Day

December 11 2012

Commentary by David Fuller

China: 2013 Outlook

My thanks to a subscriber for this excellent (232 page) report from Oriental Patron in Hong Kong. Here are a few samples from the opening sections:
Chinese leadership tends to be slightly conservative in setting the growth target, we believe China's GDP growth for the next 5 years will more likely to be in the range of 7.5-8.5% as a result of the following growth drivers: Urbanization, Demographic Composition, Investment in Information Technology and Universal Healthcare. We also see the GDP growth drivers shifting from East to West demographically [Ed: within China].

Despite a challenging global economy and numerous social problems internally in China, we do not see the risk of significant slows down in China's economy as the Chinese government still have a lot of leeway to stimulate its economic growth given its low debt level, huge foreign reserve, and continuing inflow of foreign direct investment.

China's debt as percentage of GDP at the end of 2011 is only 43.5%, versus 205.5% for Japan, 67.8% for U.S and 165.3% for Greece.

China's debt as percentage of GDP at the end of 2011 is only 43.5%, versus 205.5% for Japan, 67.8% for U.S and 165.3% for Greece.

Urbanization: The driver for next decade
Urbanization in China has experienced a number of key phases since China was founded in 1949, including: Phase 1: 1949 -1957 (Steady Development) Phase 2: 1958 -1963 (Fluctuation) Phase 3: 1964 -1978 (Stagnation) Phase 4: 1978 -Present (Accelerated Growth). For the next decade, we believe the urbanization process will move to the next phase from Industrialization promoted urbanization to government leading the urbanization process. And rapid urbanization is usually associated with very swift economic expansion as historical data shows in other countries.

The next great challenge for Chinese government to tackle in order to continue its exceptional growth through rapid urbanization is income inequality. However, given its track record, we believe heavily investment in infrastructure, effective urban planning and wider social program should ensure its high growth associated with successful rapid urbanization if the new government is able to control the spread of government corruption.

Urbanization in China over the next decade will bring significant changes to the country, resulting the emergence of 13 Mega-cities, 4 Mega-regions, and 7 Mega-corridors in 2025. These Mega Cities will grow to become the major hubs for commercial and business activity. In a bid to support urbanization, the Chinese government has announced to invest RMB 17 trillion on infrastructure, such as power supply, transportation, water, aviation between 2011 and 2015.

Long term Outlook: China to accounts for 1/3 of global GDP in 2030
According to OECD Report in September 2012 titled: "Looking to 2060: Long-term growth prospects for the world". China is projected to surpass the Euro Area in a year or so and the United States in a few more years, to become the largest economy in the world, on the basis of 2005 purchasing power parities (PPPs). China's global share of GDP on a PPPs based will increase from 17% in 2011 to 28% in 2030, while U.S will shrink from 23% to 18% and Japan will be reduced from 7% to merely 4%. China and India will experience more than a seven-fold increase of their income per capita by 2060.

David Fuller's view I like long-term forecasts because so much research understandably focuses on the short to medium term, usually meaning the next few months to a year. However, there is inevitably a considerable degree of conjecture in all multiyear projections, to which we should add the caveat: if all goes according to plan, which of course it seldom does.

However, the Oriental Patron report also contains a wealth of medium-term projections, including Industry Profiles. Additionally, considerable data on a number of Hong Kong listed mainland Chinese shares is also provided. Given Fullermoney's interest in China at this time, Eoin will be reviewing many of the shares fundamentally assessed in the report from a technical perspective later this week.

Returning to the caveat: if all goes according to plan, there are plenty of concerns about most countries and not least a dictatorship of China's size. My initial impressions of Xi Jinping are favourable but will he be able to reduce political corruption throughout China? Will a privileged ruling class be tolerated by China's increasingly educated and often entrepreneurial managers who do not have strong political connections? Or will those people just focus on achieving short-term commercial success before they get out? Political stability is essential for China's development but its leaders also need to encourage the skills and aspirations of the entire population. If China can achieve this it will probably flourish and ideally liberalise the system, as we have seen in Singapore.

There are also environmental concerns in China. The country appears to be gaining control over pollution and reducing it. However, the scarcity of potable water presents an enormous challenge.

Additionally, while China's post Mao economic growth remains a huge and probably unprecedented achievement for any country of size, this does not necessarily mean that foreigners investing in China participate equally in the success. Those of us without first hand or even insider knowledge will need to rely on our medium-term trend running skills.

Despite these concerns, China remains an economic powerhouse and the timing appears right.

See also Eoin's and my earlier comments on China posted over the last week.

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