Emerging Markets (December 27, 2010)
The three China maps shown below illustrate countries that have equal GDP to Chinese provinces in 2000, 2009 and 2020.
In China, local governments have contributed more to GDP growth than what the central government can do.
In 2000, China’s union of provinces was similar to poor, developing countries. By 2009, China had grown into a union of provinces similar to many booming, developing countries.
By 2020, it is projected that China GDP will be the sum of top-tier developing countries.
Strengths
- China’s GDP growth from 2000 to 2009 was more driven by fixed asset investments (FAI), followed by exports and domestic consumption. This was possible because China had vast demand for highways, railways and power generation, in addition to global demands for what China has produced. In the next decade, China will continue to build its infrastructure, particularly in Western and Central China, but China has recently made a strategic decision to change its GDP growth model that is driven more by domestic consumption, and less by relying on FAI and exports. We think this is the right approach and it is possible. In a conference in Beijing recently, we heard Chinese government advisors say that China wants to build the largest consumption market in the world.
- Thailand’s exports increased by a higher-than-expected 28.5 percent in November from a year earlier to $17.7 billion, driven by shipment growth to Southeast Asia, Japan and China.
- Taiwan’s unemployment rate declined to a better-than-expected 4.8 percent in November from 5 percent in October, the lowest reading in two years.
- Taiwan will raise the daily limit for tourist arrivals from mainland China to 4,000 from 3,000, effective January 1, 2011.
- Russian billet export prices are holding firm, with scrap prices continuously improving and available tonnages sparse. The recent shipments in the Black Sea took place at a price of $610 per ton. With scrap, iron ore and coal prices all going up, producers say that their offer prices are justified.
Weaknesses
- Even as a move on Christmas Day was a surprise, the 25-basis point increase in benchmark one-year interest rates announced on Saturday was in line with a majority view in a Reuters poll earlier this month. Most economists had predicted that China would raise rates by the end of this year and the consensus was for two more increases in the first half of 2011.
- Due to a huge stimulus plan from late-2008 to early-2009 to rescue its economy from sliding during the global financial crisis, plus huge capital inflow from trade surplus, foreign direct investment and hot money, China is now facing the issue of rising inflation expectations. However, Chinese government quantitative tightening and other administrative measures have successfully contained food price increases since the second part of November. We expect China will manage a soft landing in controlling inflation and keep its growth engine humming.
- China’s National Development and Reform Commission may slash prices for 658 approved medical drugs by an average 40 percent and lower prices for certain Chinese traditional medicine and vitamins by as much as 70 percent, to increase affordability of medication to the general public. When implemented, this will be the fourth price reduction for nationally-approved drugs since 2009.
- Fitch downgraded Hungary one notch to BBB-, joining Moody’s Investor Service and Standard and Poor’s in questioning the sustainability of the new cabinet’s fiscal policy. Hungary is the EU’s most indebted eastern member, with public debt estimated at 79 percent of GDP this year.
Opportunities
- China domestic consumption is expected to grow 18 percent this year to reach 15.7 trillion RMB (about $2.4 trillion). With increasing personal income, this trend should continue. In its 12th five-year plan, China intends to invest to upgrade old industries, invest in new and emerging industries, new energy, biotechnology, agriculture, social security and environmental protections. For example, in a research report, China Electricity Council estimated China will invest 11.1 trillion RMB ($1.7 trillion) in the next 10 years to upgrade electricity infrastructure.
- China plans to invest 11.1 trillion yuan ($1.7 trillion) in the next decade to enhance electricity infrastructure, including 5.3 trillion yuan on power grids and power stations from 2011 to 2015, a 68 percent increase from the previous five years. Power generation by non-fossil fuels is expected to comprise 33 percent of the total capacity by 2015. This policy should benefit Chinese domestic power equipment makers, especially those with more nuclear exposure.
- Cold temperatures at the start of December moved spot gas prices in Europe sharply higher, converging with the oil-linked prices for Russian gas exports. UK and European storage inventory started the winter at below average levels, creating potential upside for export volumes.
Threats
- For China to switch from an FAI-driven GDP to one driven by domestic consumption, there are challenges, such as increasing labor costs, RMB appreciation, and relatively low-level industrialization and competitiveness. We think these can be solved by increased productivity, education and training.
- The Securities and Exchange Commission’s recent investigation of certain Chinese companies accessing U.S. capital markets through reverse mergers and their U.S. auditors might weigh on investor sentiment toward U.S.-traded Chinese stocks in the short term.
- Policy makers in Russia are weighing the first interest rate increase since 2008 after inflation accelerated in November to an annual 8.1 percent, the fastest in 11 months, fueled by food prices that rose after a summer drought.
- According to the Polish daily Dziennik, transfers to private pension funds would decline from the current 7.3 percent of salary to 2 or 3 percent, with the balance staying in the pay-as-you-go system.
