Now the world’s second largest economy, a critical geopolitical player, home to the largest population on earth and the world’s largest consumer of raw materials, how China charts its future will have a major impact on the rest of the world. China’s National People’s Congress met this week to approve China’s new five year plan to 2015, outlined by Premier Wen last weekend. The key objectives: Slower more sustainable growth to help deal with the issue of rising domestic inflation; more renewable energy sources and greater energy efficiency; and more inclusive growth to help address social imbalances and boost domestic consumption. So what does this mean in practice for both China and the rest of the world?
Economic growth: China’s guideline GDP target growth rate has been reduced from 7.5% to 7% per annum. Bear in mind of course, that China has exceeded its growth targets by a significant amount over the course of its last five year plan, growing 10.1% last year, so 7% is the least we could expect. Let’s put this in context – or rather allow Goldman Sachs to do so: If China grows around 10% in US$ terms this year – which is highly likely, an underestimate as this would be achieved with no inflation, 7 pct real GDP growth and a 3% annual rise of the renminbi against the Dollar), China will create more than another Indonesia or Turkey next year. The implications: More Chinese goods coming on to world markets, but also the creation of large potential consumer markets in China as incomes are distributed.
Cleaner and more sustainable growth: Pollution and environmental degradation is a huge problem, one that the Chinese government acknowledges and in the new plan has set out clear targets and initiatives to address. More sustainable growth will be aided by a focus on growing critical future industries – a projected $600bn is committed to growing sectors such as information technology, clean energy, environmental protection and scientific research and innovation, for example. New buildings and infrastructure will also have a cleaner, greener focus. The implications: By necessity – and desire – China will be one of the leading nations driving sustainable technologies in future. China is projected to surpass Germany as the world’s largest solar energy market by 2013, while it already has a leading position in wind energy.
Energy consumption: According to the International Energy Agency (IEA), China surpassed the US in 2009 to become the world’s largest consumer of energy, and it increased energy consumption a further 5.9% in 2010. Even if China achieves its stated target of cutting fossil fuel use to 88.6% of energy supply by 2015, reducing energy consumption relative to GDP by 16% and cutting carbon emissions relative to GDP by 17%, it will still be the world’s largest user of energy. The challenge is that it has to import much of the fuel it uses, including coal, oil and natural gas. The IEA suggests that last year China consumed 5.3% more coal, 12.9% more crude oil and 18.2% more natural gas than in 2009 – imports of liquefied natural gas jumped 69%. This demand has kept prices of these commodities high and even though China will increase domestic production of gas as well as trying to make its coal industry more competitive, high energy commodity prices look set to remain. The unrest in the Middle East and North Africa, already contributing to soaring oil prices, will add further pressure on primary energy commodities. With substantial increases expected in Chinese nuclear power as well, China may also become the largest importer of uranium by 2030. It may be good news for commodity producers, along with the clean energy. The bad news is that even with substantial efficiencies, the rising cost of energy may push up inflation and consumer prices both in China and the rest of the world which relies on Chinese exports.
Raw materials: It’s a similar story for other raw materials including metals and construction materials such as cement. China’s population needs more and more affordable housing, along with more infrastructure as cities grow and focus increases on developing rural areas to help relieve pressure on major cities and improve social conditions. China plans to build or renovate 10 million units of affordable housing this year and the same number next year as part of a 36-million-unit program costing US$200 billion over five years. Even with slower overall economic growth, China is likely to continue to have a significant impact on raw material prices worldwide – and any falls in price will be limited. Take for example China’s surprise trade deficit, the largest in seven years, just announced for February 2011. Commentators suggest that this is a temporary blip partly due to the impact of the Chinese New Year at the start of February, when economic activity and therefore exports typically fall. Looking at import volumes of iron ore and copper versus a year earlier though, it becomes clear that the increase in import value is largely due to higher commodity prices rather than any increase in Chinese import volumes. Again, the trends point towards potential inflationary pressures both at home and abroad.
More inclusive growth: Tax breaks, increased healthcare and social welfare spending, along with higher minimum wages particularly for migrant workers and in rural areas point to the Chinese government’s focus on increasing domestic consumption. Greater state-funded safety nets for critical services such as health will (hopefully) allow a reduction in the very high levels of savings typical amongst the Chinese population and drive spending to start to balance export-led growth. Already, it is clear that new found wealth has been translated into higher demand for goods and services. Car sales grew over 30% last year, with car manufacturers “warning” of only 10-15% growth this year – wouldn’t that be a nice problem in developed markets? Forbes’ latest list of billionaires reveals that there are now more billionaires in leading emerging markets than in Europe – at the start of 2011 the magazine recorded 301 billionaires in the BRIC countries, one more than in Europe. So there is clearly spending power in China, which with the new five year plan will become more distributed between the provinces and the city engines of growth. Yet, whether this will play out as planned remains to be seen – imports rose significantly less than expected in February, a measure of domestic demand and another contributor to the trade deficit. Increasing food prices are also a major subject of complaint among consumers. The bottom line: Exports will remain critical to future growth, while domestic consumers will struggle with higher prices at home.
So what does this mean overall: China will remain a critical engine of global economic growth. It already has the ability to move markets, whether energy or raw materials, and will continue to do so, even as it builds leadership in clean technologies which will allow it to reduce its dependence on primary commodities to some extent. Inflation will remain a challenge, which will likely become greater over the life of the five year plan. Higher costs of goods in China could translate into a new era where Chinese exports are no longer cheap. With the potential for the renminbi to appreciate over time as well, developed market consumers and businesses that now rely on these goods and services may feel pressure, even as their own economies remain sluggish. Still, it could potentially be good news for developed world exporters who would become more competitive, unless, of course, the next low cost exporter takes up the mantle from China.
