China tipped to grow 9pc as leaders change

By Brian Fallow

ANZ chief economist Paul Gruenwald. Photo / Supplied
ANZ chief economist Paul Gruenwald. Photo / Supplied

ANZ expects the Chinese economy to expand 9 per cent this year - not least for political reasons.

The bank's chief economist for Asia-Pacific, Paul Gruenwald, says that growth forecast, which is higher than consensus but lower than China's recent trend, is partly because of an impending change of political leadership, and not just at the national level.

"Twenty-six of the 31 provinces have new provincial leaders, and everyone likes to over-perform at the beginning, to show how astute they are."

There are some lingering concerns on the part of the Chinese authorities about an overheated property market - the legacy of monetary easing in the aftermath of the global financial crisis - but prices look like they are starting to fall.

And the central bank, the People's Bank of China, switched late last year from being worried about inflation to trying to support growth, Gruenwald said. He expects some further easing yet.

Progress is being made on rebalancing the Chinese economy, he says. Its politically sensitive current account surplus, for example, has fallen from around 10 per cent of GDP in 2007 to only a quarter of that.

Just as New Zealand needs to rebalance in the direction of more saving and less spending, more investment and less consumption, more exporting and less importing, China needs to rebalance in the opposite direction.

Its growth in recent years has been top-heavy in investment spending, while consumption represent a relatively puny 35 per cent of gross domestic product.

"We want more resource into the household sector and real incomes to grow faster," he said. "They have been. Wages last year in China were probably 15 per cent up on average."

Three or four years ago the accusation was that China was exporting deflation to the rest of the world.

"Now we are going to have the opposite issue, where it will be accused of exporting inflation," Gruenwald said.

"If you are a Chinese exporter and your labour costs are rising and you are getting fewer renminbi for your export dollar, your margins are getting squeezed. To survive in that environment the obvious thing is to try to pass on your costs. Everything we have heard suggests that is what is happening. Retailers on the other side, like Walmart, are having to pay more for goods in China."

But in a period of slack global demand a modest dose of inflation from China was not necessarily a bad thing, he said.

Since the global financial crisis growth in China had been a completely domestic story.

"But it has been forced investment rather than consumption, so we need to move away from that to a more market-based, consumption model," he said.

"China's risk is wasted, low-productivity investment. But that only gets you into trouble if it moves on to the public balance sheet and the amount is so big that it endangers the fiscal sustainability of the country. Everything we have seen so far is that is is not of that order of magnitude yet."

There is a tendency in the West to see some of the command-economy features of the Chinese system as a sort for scaffolding while a more "normal" economy is constructed.

But Gruenwald says it is an open question how China's economy will evolve.

"Do they go to a Singapore-style system where there is a reasonably large amount of government control but the market works? Whether they go to full Western-style democracy is probably debatable. My guess is they will go to a hybrid model."

Gruenwald, who worked for the International Monetary Fund for 15 years before joining ANZ, has no quarrel with the view that the movement of large numbers of people in Asia from rural poverty into middle-income status is fundamentally positive for a food exporter like New Zealand.

"If you look at Japan, Korea, Taiwan and now China the amount of calories consumed per capita tends to accelerate at this middle income level."

- NZ Herald

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