Institutional Template
6 October 2009
Consumption to Propel China’s Growth The Chinese government has reiterated their 2009 growth forecast of at least 8% for China’s economy. So far it appears that this target is achievable even though net exports is losing steam. Would investments and consumption be able to sustain economic growth for the long term? Being traditionally exports driven, it may be difficult to imagine that China could still see strong economic growth of 7-8% despite the strong decline in shipments. However, the Chinese government is very confident that the Chinese economy would grow by 8% in 2009 and the International Monetary Fund (IMF) also forecasted a growth of 8.5% in their October issue of the IMF World Economic Outlook (WEO) report. In the past eight months, we have witnessed that investments was the main propeller of growth and exports have taken a back seat. Figure 1 tabulates the primary indicators of economic growth. The table shows clearly that in the first half of 2009, exports declined 21.7% on average, a sharp contrast to the reasonably strong average growth of 17.2% in 2008. On the other hand, indicators such as retail sales and fixed asset investments (FAI) have been growing at a stable pace for the past few months. China’s FAI has been growing at more than 30% on average in the first half of 2009, exceeding the average monthly growth of 26.1% in 2008. The reason for the strong growth in FAI stems from actions by Chinese banks in providing new loans to the infrastructure, construction and public welfare projects. However, this could change in the next 6-12 months after the government announced policies effective July to slow loan growth. Figure 1: Exports waning as a growth driver May June July August Growth year-on-year (%) 2009 2009 2009 2009 Retail Sales 15.2 15.0 15.2 15.4 Fixed Asset Investments (FAI) 32.9 33.6 32.9 33.0 Exports -26.3 -21.3 -23.0 -23.4 Imports -24.8 -13.0 -14.9 -17.1 Source: National Bureau of Statistics, Customs, People’s Bank of China (PBoC)
H1-2009 15.0 35.3 -21.7 -25.4
2008 Average 21.6 26.1 17.2 18.5
The Equation That Sums Up Economic Growth The most common method of measuring gross domestic product (GDP) would be to use the expenditure method where gross domestic product is a summation of the value of private consumption, gross investments, government spending and net exports (which is the current account deficit or surplus). Refer to the abbreviated formula below.
GDP = C + I + G + (X - M) In this report, we will provide a breakdown of the different contributors of growth to provide a clearer picture on where the growth drivers come from. Contrary to the impression that net exports is the largest driver of growth for China, based on figures from CEIC, their actual contribution is only 7.9%, whereas a combination of household consumption, government spending and private investments contribute more than 90% to the growth of the Chinese economy. Figure 2: Contributors of China’s economic growth in 2008
Household Consumption 35.3%
Net Exports 7.9%
Government Spending 13.3%
Private Investments 43.5%
Source: CEIC
No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
1
In the past eight months, investments have been a strong contributor to the Chinese economy. However, there are signs that growth in investments is likely to slow now that the government has decided to curtail bank lending. Growth in Investments Likely To Taper Off The RMB 4 trillion stimulus package promised by the Chinese government has seen funds being channelled to lending to State-Owned Enterprises (SOEs) and government-related companies to propel infrastructure spending. Urban FAI dominated by sectors such as road, rail transport and water processing showed spikes in growth after the stimulus package was announced. In the past eight months, RMB 8.1 trillion new monies were being loaned out by Chinese banks. Figure 3 show that significant amounts of RMB 1.6 trillion and RMB 1.9 trillion were loaned out in the months of January and March 2009. We think that it is unlikely that such massive lending would continue to take place in the next 12 months given that the average monthly amount lent out is much lower at RMB 259.2 billion since PBoC began tracking this component in May 1999. Figure 3: Strongest Growth in Lending
2000 1800 1600 'Billions RMB
1400 1200 1000 800 600 400 200 May-09
Nov-08
May-08
Nov-07
May-07
Nov-06
May-06
Nov-05
May-05
Nov-04
Nov-03
May-04
Nov-02
May-03
Nov-01
May-02
Nov-00
May-01
Nov-99
May-00
May-99
0
Source: People’s Bank of China (PBoC) The China Banking Regulatory Commission (CBRC) has also indicated its concerns over excessive credit creation. In July, CBRC asked lenders to increase reserves against non-performing loans and to ensure that loans for fixed asset investments go to projects that support the real economy. They are also providing more guidelines on providing credit to small-and-medium sized enterprises. The government has highlighted its concerns over the sharp loan growth and the possibility of these loans being used to trade on the equity market. These could result in the contribution from investments tapering off in the near term. On the other hand, we think that consumption would be growing in terms of importance (particularly in the medium to long term) due to three reasons the middle-class population in China is growing, urbanization would lead to an increase in demand for services catering to migrants from the rural areas, and consumers in China have a strong capacity to spend given their historically high savings rate. Consumption to be driven by Growing Affluence China’s private consumption grew more than 20% in 2008, and currently ranks as the world’s fifth largest private consumption market. Refer to figure 4. Aside from the growing prominence from a global standing, Chinese consumers have become increasingly important in Asia. In the midst of the global financial crisis, Asia’s exports to China saw a marked uptrend while exports to Europe and US either remained stagnant or suffered declines. Domestic growth in retail sales stayed at a reasonably strong growth of 21.7% in 2008. Refer to figure 5. So far, growth in retail spending in 2009 has stayed at a stable rather than an accelerating speed. According to a report from MasterCard Insights on Understanding the Affluent Consumers of China, China’s middle class (earning between US$6,000 to US$25,000 per annum) has emerged from virtual non-existence in the early 1990s to 87 million in 2005, and it will increase 3.6 times to 312 million by 2015. This is with the assumption that the economic growth of 8% is maintained. McKinsey estimated that those earning in excess of US$36,000 per annum reached 1.6 million in No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
2
2008. To put the numbers in perspective, based on purchasing power parity, a household earning US$36,000 in China has similar spending power to households earning US$100,000 in the States. th
Figure 4: China is World’s 5 Largest Consumption Market Private Consumption 2007 2008 (US$ Billions) USA 9,826 10,129 Eurozone 6,987 7,704 Japan 2,466 2,839 United Kingdom 1,788 1,718 China 1,231 1,560 Source: CLSA Asia-Pacific Markets
Growth (%) 3.1 10.3 15.1 -3.9 26.7
Figure 5: Stable Growth in Retail Sales
1200
40.0%
1000
Retail Sales 'Billion RMB (LHS)
35.0%
Retail Sales Growth YoY (RHS)
30.0%
800
25.0%
600
20.0% 15.0%
400
10.0% 200
5.0% Mar-09
May-08
Jul-07
Sep-06
Nov-05
Jan-05
Mar-04
May-03
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
0.0% Jan-95
0
Source: National Bureau of Statistics Growing affluence also means a shift in purchasing preferences. The boom in car sales is a case in point. The China Association of Automobile Manufacturers reported that car sales rose to 858,300 in August, an increase of 90% year-onyear. It is expected that sales would slow down in the following year as the help of government subsidies and tax cuts fade but the strong growth in vehicle purchases signals that the willingness to spend on what would have been considered a luxury in the past. According to a CLSA report, China has added 200 million people from 1999 to 2009 to urban areas. As more migrants move to urban areas, plans were made to develop the infrastructure to accommodate urbanites. In the long term, this is likely to propel the demand for basic materials, housing and consumer goods and services. The shift to urbanization also means a shift in lifestyle requirements. For instance, goods that were considered luxuries in the past have become requirements. Examples would be Liquid Display Panels (LCD) television and disposable paper diapers, which were considered as luxuries five years ago for Chinese. The third reason would be the capacity of the Chinese to spend given their higher savings rate. Gross domestic savings rate in 2008 was 51.2%. Figure 6 shows that among Asian economies, China has one of the highest saving rates. As they rise to the ranks of the middle class, they would have a higher willingness to spend on new and more expensive goods and services.
No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
3
Figure 6: High Gross Domestic Savings Rate, 2008
US Philippines Taiwan Australia Indonesia Korea Hong Kong Thailand India Malaysia Singapore China
12.86 20.1 26 28 30.6 30.7 31.1 33.2 33.8 42.3 48.3 51.2 0
10
20
30
40
50
60
Source: CEIC, World Bank, IMF Net Exports contribution muted in the near term In comparison to its Asian peers, China exports have underperformed. Based on a report from CLSA, from the February/March period to July, Chinese exports only increased by 12%, much lower than 25% and 39% in Taiwan and Korea respectively. Though exports have been growing at a slower pace, China’s manufacturing sector shows a different picture. The China Purchasing Managers Index (PMI) has stayed above 50 since March 2009, indicating a possibility of returning to levels near the market peak in 2007. The index increase could be a result of increase in demand from consumption and infrastructure after the government policies were put in place. We believe that for net exports to recover, we need to see stronger signs of improvement in the willingness to spend from the Western developed economies. Consumption Important Propeller of Growth We have strong reasons to believe that both investment and consumption would be strong contributors to growth in the medium to long term. However, given that the government is exhibiting more obvious signals to clamp down on excessive lending in certain areas including property and infrastructure, contribution from FAI would likely slow. Consumption would emerge as a stronger contributor given that urbanization has positive repercussion on creating new demand for goods and services, there is an increase in the number of middle-income earners and a higher savings rate means spending capacity for the Chinese. For net exports to recover, signs of a stronger consumer-driven recovery in the Western developed economies would be required. Strong brands are important when we look at consumer-related companies. We invest in market leaders that exhibit strong management capabilities and the drive to innovate. In addition, corporate governance is also an important criterion when assessing these companies. Aligned with the perspective that with growing affluence, reliable and established brands in China would be able to demand a higher premium for the products sold, this would mean essentially better margins for these companies.
This material is prepared by First State Investments (Singapore) and is provided for information purposes only. First State Investments (Singapore) do not warrant the adequacy or completeness of such information. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of you acting on this information. All applications for units in the Fund must be made on the application forms accompanying the Prospectus. Investors should read the Prospectus before deciding whether to subscribe for or purchase units in the Fund. The Prospectus is available and copies may be obtained from First State Investments (Singapore) and our Distributors. The value of the units in the Fund and the income from them may rise as well as fall. Past performance figures are not necessarily a guide to future performance. Neither is any forecast made necessarily indicative of the future or likely performance of the Fund. Units are not available to US persons. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
4
Consumption to Propel China’s Growth The Chinese government has reiterated their 2009 growth forecast of at least 8% for China’s economy. So far it appears that this target is achievable even though net exports is losing steam. Would investments and consumption be able to sustain economic growth for the long term? Being traditionally exports driven, it may be difficult to imagine that China could still see strong economic growth of 7-8% despite the strong decline in shipments. However, the Chinese government is very confident that the Chinese economy would grow by 8% in 2009 and the International Monetary Fund (IMF) also forecasted a growth of 8.5% in their October issue of the IMF World Economic Outlook (WEO) report. In the past eight months, we have witnessed that investments was the main propeller of growth and exports have taken a back seat. Figure 1 tabulates the primary indicators of economic growth. The table shows clearly that in the first half of 2009, exports declined 21.7% on average, a sharp contrast to the reasonably strong average growth of 17.2% in 2008. On the other hand, indicators such as retail sales and fixed asset investments (FAI) have been growing at a stable pace for the past few months. China’s FAI has been growing at more than 30% on average in the first half of 2009, exceeding the average monthly growth of 26.1% in 2008. The reason for the strong growth in FAI stems from actions by Chinese banks in providing new loans to the infrastructure, construction and public welfare projects. However, this could change in the next 6-12 months after the government announced policies effective July to slow loan growth. Figure 1: Exports waning as a growth driver May June July August Growth year-on-year (%) 2009 2009 2009 2009 Retail Sales 15.2 15.0 15.2 15.4 Fixed Asset Investments (FAI) 32.9 33.6 32.9 33.0 Exports -26.3 -21.3 -23.0 -23.4 Imports -24.8 -13.0 -14.9 -17.1 Source: National Bureau of Statistics, Customs, People’s Bank of China (PBoC)
H1-2009 15.0 35.3 -21.7 -25.4
2008 Average 21.6 26.1 17.2 18.5
The Equation That Sums Up Economic Growth The most common method of measuring gross domestic product (GDP) would be to use the expenditure method where gross domestic product is a summation of the value of private consumption, gross investments, government spending and net exports (which is the current account deficit or surplus). Refer to the abbreviated formula below.
GDP = C + I + G + (X - M) In this report, we will provide a breakdown of the different contributors of growth to provide a clearer picture on where the growth drivers come from. Contrary to the impression that net exports is the largest driver of growth for China, based on figures from CEIC, their actual contribution is only 7.9%, whereas a combination of household consumption, government spending and private investments contribute more than 90% to the growth of the Chinese economy. Figure 2: Contributors of China’s economic growth in 2008
Household Consumption 35.3%
Net Exports 7.9%
Government Spending 13.3%
Private Investments 43.5%
Source: CEIC
No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
1
In the past eight months, investments have been a strong contributor to the Chinese economy. However, there are signs that growth in investments is likely to slow now that the government has decided to curtail bank lending. Growth in Investments Likely To Taper Off The RMB 4 trillion stimulus package promised by the Chinese government has seen funds being channelled to lending to State-Owned Enterprises (SOEs) and government-related companies to propel infrastructure spending. Urban FAI dominated by sectors such as road, rail transport and water processing showed spikes in growth after the stimulus package was announced. In the past eight months, RMB 8.1 trillion new monies were being loaned out by Chinese banks. Figure 3 show that significant amounts of RMB 1.6 trillion and RMB 1.9 trillion were loaned out in the months of January and March 2009. We think that it is unlikely that such massive lending would continue to take place in the next 12 months given that the average monthly amount lent out is much lower at RMB 259.2 billion since PBoC began tracking this component in May 1999. Figure 3: Strongest Growth in Lending
2000 1800 1600 'Billions RMB
1400 1200 1000 800 600 400 200 May-09
Nov-08
May-08
Nov-07
May-07
Nov-06
May-06
Nov-05
May-05
Nov-04
Nov-03
May-04
Nov-02
May-03
Nov-01
May-02
Nov-00
May-01
Nov-99
May-00
May-99
0
Source: People’s Bank of China (PBoC) The China Banking Regulatory Commission (CBRC) has also indicated its concerns over excessive credit creation. In July, CBRC asked lenders to increase reserves against non-performing loans and to ensure that loans for fixed asset investments go to projects that support the real economy. They are also providing more guidelines on providing credit to small-and-medium sized enterprises. The government has highlighted its concerns over the sharp loan growth and the possibility of these loans being used to trade on the equity market. These could result in the contribution from investments tapering off in the near term. On the other hand, we think that consumption would be growing in terms of importance (particularly in the medium to long term) due to three reasons the middle-class population in China is growing, urbanization would lead to an increase in demand for services catering to migrants from the rural areas, and consumers in China have a strong capacity to spend given their historically high savings rate. Consumption to be driven by Growing Affluence China’s private consumption grew more than 20% in 2008, and currently ranks as the world’s fifth largest private consumption market. Refer to figure 4. Aside from the growing prominence from a global standing, Chinese consumers have become increasingly important in Asia. In the midst of the global financial crisis, Asia’s exports to China saw a marked uptrend while exports to Europe and US either remained stagnant or suffered declines. Domestic growth in retail sales stayed at a reasonably strong growth of 21.7% in 2008. Refer to figure 5. So far, growth in retail spending in 2009 has stayed at a stable rather than an accelerating speed. According to a report from MasterCard Insights on Understanding the Affluent Consumers of China, China’s middle class (earning between US$6,000 to US$25,000 per annum) has emerged from virtual non-existence in the early 1990s to 87 million in 2005, and it will increase 3.6 times to 312 million by 2015. This is with the assumption that the economic growth of 8% is maintained. McKinsey estimated that those earning in excess of US$36,000 per annum reached 1.6 million in No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
2
2008. To put the numbers in perspective, based on purchasing power parity, a household earning US$36,000 in China has similar spending power to households earning US$100,000 in the States. th
Figure 4: China is World’s 5 Largest Consumption Market Private Consumption 2007 2008 (US$ Billions) USA 9,826 10,129 Eurozone 6,987 7,704 Japan 2,466 2,839 United Kingdom 1,788 1,718 China 1,231 1,560 Source: CLSA Asia-Pacific Markets
Growth (%) 3.1 10.3 15.1 -3.9 26.7
Figure 5: Stable Growth in Retail Sales
1200
40.0%
1000
Retail Sales 'Billion RMB (LHS)
35.0%
Retail Sales Growth YoY (RHS)
30.0%
800
25.0%
600
20.0% 15.0%
400
10.0% 200
5.0% Mar-09
May-08
Jul-07
Sep-06
Nov-05
Jan-05
Mar-04
May-03
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
0.0% Jan-95
0
Source: National Bureau of Statistics Growing affluence also means a shift in purchasing preferences. The boom in car sales is a case in point. The China Association of Automobile Manufacturers reported that car sales rose to 858,300 in August, an increase of 90% year-onyear. It is expected that sales would slow down in the following year as the help of government subsidies and tax cuts fade but the strong growth in vehicle purchases signals that the willingness to spend on what would have been considered a luxury in the past. According to a CLSA report, China has added 200 million people from 1999 to 2009 to urban areas. As more migrants move to urban areas, plans were made to develop the infrastructure to accommodate urbanites. In the long term, this is likely to propel the demand for basic materials, housing and consumer goods and services. The shift to urbanization also means a shift in lifestyle requirements. For instance, goods that were considered luxuries in the past have become requirements. Examples would be Liquid Display Panels (LCD) television and disposable paper diapers, which were considered as luxuries five years ago for Chinese. The third reason would be the capacity of the Chinese to spend given their higher savings rate. Gross domestic savings rate in 2008 was 51.2%. Figure 6 shows that among Asian economies, China has one of the highest saving rates. As they rise to the ranks of the middle class, they would have a higher willingness to spend on new and more expensive goods and services.
No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
3
Figure 6: High Gross Domestic Savings Rate, 2008
US Philippines Taiwan Australia Indonesia Korea Hong Kong Thailand India Malaysia Singapore China
12.86 20.1 26 28 30.6 30.7 31.1 33.2 33.8 42.3 48.3 51.2 0
10
20
30
40
50
60
Source: CEIC, World Bank, IMF Net Exports contribution muted in the near term In comparison to its Asian peers, China exports have underperformed. Based on a report from CLSA, from the February/March period to July, Chinese exports only increased by 12%, much lower than 25% and 39% in Taiwan and Korea respectively. Though exports have been growing at a slower pace, China’s manufacturing sector shows a different picture. The China Purchasing Managers Index (PMI) has stayed above 50 since March 2009, indicating a possibility of returning to levels near the market peak in 2007. The index increase could be a result of increase in demand from consumption and infrastructure after the government policies were put in place. We believe that for net exports to recover, we need to see stronger signs of improvement in the willingness to spend from the Western developed economies. Consumption Important Propeller of Growth We have strong reasons to believe that both investment and consumption would be strong contributors to growth in the medium to long term. However, given that the government is exhibiting more obvious signals to clamp down on excessive lending in certain areas including property and infrastructure, contribution from FAI would likely slow. Consumption would emerge as a stronger contributor given that urbanization has positive repercussion on creating new demand for goods and services, there is an increase in the number of middle-income earners and a higher savings rate means spending capacity for the Chinese. For net exports to recover, signs of a stronger consumer-driven recovery in the Western developed economies would be required. Strong brands are important when we look at consumer-related companies. We invest in market leaders that exhibit strong management capabilities and the drive to innovate. In addition, corporate governance is also an important criterion when assessing these companies. Aligned with the perspective that with growing affluence, reliable and established brands in China would be able to demand a higher premium for the products sold, this would mean essentially better margins for these companies.
This material is prepared by First State Investments (Singapore) and is provided for information purposes only. First State Investments (Singapore) do not warrant the adequacy or completeness of such information. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of you acting on this information. All applications for units in the Fund must be made on the application forms accompanying the Prospectus. Investors should read the Prospectus before deciding whether to subscribe for or purchase units in the Fund. The Prospectus is available and copies may be obtained from First State Investments (Singapore) and our Distributors. The value of the units in the Fund and the income from them may rise as well as fall. Past performance figures are not necessarily a guide to future performance. Neither is any forecast made necessarily indicative of the future or likely performance of the Fund. Units are not available to US persons. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. No part of this document should be used, circulated or reproduced without the prior approval of First State Investments (Singapore).
4
