China Sees 7% as Bottom-Line Growth Tolerable in Slowdown
Comment of the Day

July 23 2013

Commentary by Eoin Treacy

China Sees 7% as Bottom-Line Growth Tolerable in Slowdown

This article from Bloomberg may be of interest to subscribers. Here is a section
Lu Ting, head of Greater China economics at Bank of America in Hong Kong, said the transcript was “important information,” with Li indicating that the “floor” for growth this year was 7.5 percent, while 7 percent was the lower limit for the period through 2020. Lu said that the government may roll out a “small scale fiscal expansion” including spending on railways, social housing and environmental and information-technology infrastructure.

Shen Jianguang, chief Asia economist at Mizuho in Hong Kong, said 7.5 percent is the lower limit this year and percent is the boundary starting next year. The government is already trying to support expansion with spending on railways, city infrastructure and environmental protection, Shen said.

Finance Minister Lou Jiwei said in a press briefing in Washington on July 11 that growth as low as 6.5 percent may be tolerable in the future. While the government in March set a 2013 growth goal of 7.5 percent, Lou said he's confident 7 percent can be achieved this year.

Eoin Treacy's view As a country moves up the GDP per capita scale, outsized growth rates become progressively more difficult to sustain. In simple terms, less is needed in terms of productivity gains to move GDP per capita from $1 to $2 than from $1000 to $2000. China has succeeded in lifting its per capita GDP impressively over the last 30 years. As the absolute wealth of the country increases, the pace of the expansion can logically be expected to moderate even in the most bullish scenario.

Tolerance for a lower growth rate has coincided with the realisation that per capita productivity gains from infrastructure development and the low cost export model are now outweighed by those that come from enhancing the country's human capital. Fostering a consumer culture, services industry, higher valued added manufacturing and private sector entrepreneurship are major policy goals that are likely to dominate for the next decades. In the meantime, the administration is walking a fine line between continuing to support major employers, attempting to motivate consumer spending while also rationalising uncompetitive industries.

With valuations much improved we can probably conclude that much of this news is already priced into the stock market. The CSI300 Index continues to range, with a mild upward bias, above the December lows near 2100. A sustained move below this week's low near 2160 would be required to question medium-term potential for continued higher to lateral ranging.

Last September the bank, industrial and materials sectors represented 65% of the CSI300. Today that weighting has fallen to just over 60%, not least because of the underperformance of these sector relative to information technology, healthcare and consumer staples this year. While these sectors are not yet large enough to exert a strong influence on the wider market they are by far the fastest growing.

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