China’sChina s New ModelA d Wh t It MAnd What It Means

For Latin America

Arthur KKroeber March 2013

China is still growin

1. GDP growth will average 7% in 201

2. Structural reforms are necessary fodeliver enough despite political op

3 Th h d i i l d hif i3. The growth driver is already shiftin

4 D d f i t t i i f t4. Demand for investment in infrastrustrong and will be a key swing facto

5. Financial liberalization is moving faaccount opening is constrained byaccount opening is constrained by

ng – but differently

12-20, down from 11% in 2002-11

or that level of growth; new leaders will position and debt constraints

f i ig from investment to consumption

t h i d l t i tillucture, housing and new plant is still or

aster than many realize, but capital financial repression elsewherefinancial repression elsewhere

2

Catch-up growth still has a long way to run

3

Slower growth does not meaan China gets less important

4

Policy shifts from cyclical man

• Government’s ability to smoot

d i i i d band investment is constrained b

ratios

• Achieving potential growth re

capital allocation:

o Financial liberalization (highe( g

o Competition (curtai

o Fiscal (improo Fiscal (impro

o Factor prices (energ

• New leaders will pursue reform• New leaders will pursue reform

incrementally

nagement to structural reform

th cycles by pumping up credit

b hi h i d d bby high investment and debt

quires reforms to improve

er return on investment))

il SOEs and local protectionism)

ove local govt incentives)ove local govt incentives)

gy, water, land)

m but cautiously andm, but cautiously and

5

One policy constraint: Deebt levels are now higher

6

Another constraint: Tight job markeet means more inflationary pressure

7

Diminishing returns fromm a high investment rate

8

How low could inve

Average real AveragePeriod

Average real growth in

investment

Averagegrowth inconsump

1996-2000 8.8% 8.9%

2001-2005 14.6% 8.6%

2006-2010 16.4% 11.1%

2011-2015e 6.5% 10.4%

2016-2020e 3.2% 9.8%

estment growth go?

e real Investmente real n final ption

Average real GDP growth

Investment ratio at end of

period

% 8.6% 34%

% 9.8% 40%

% 11.2% 46%

% 7.8% 44%

% 6.7% 39%

9

‘Acceleration’ means fast growwth in high-value consumption

10

Income inequality means a ffat tail of affluent consumers

11

External imbalances are much less severe

12

No capital misallocation: Returns in industry rise as state role shrinks

13

A chronic houssing shortageWe estimate China’s urban housing stock to comprise around 170-180m units of independent housing (those with their own kitchen and bathroom) by 2012.

This is significantly less than the total number of urban households. The remaininghouseholds. The remaining “under-housed” population is mostly migrant workers whose living quarters do not meet the definition of independent housing.

Th t l d b tThe government-led boost in the construction of low-cost housing since 2009 will help gradually address thishelp gradually address this shortage.

14

De facto interest rate libberalization is advancing

15

A switch to promoting rather thhan restricting portfolio capital

16

The changing environmeLast decade

F h

Revenue

• Fast growth as most main early stages of developmentLi it d titi d

Revenue • Limited competition dustructural undersupply

• All firms have pricing po

Costs

• Plentiful supply of laborlow prices

Costs • Low and undifferentiatereal interest rates

Winners

• Fast-growing markets reward those who can efirst and expand capacitfirst and expand capacitmost quickly

nt for Chinese companiesNext decade

k G h i l l larkets

t

• Growth in sales volume slows as markets mature

• More competition as it t h tue to

ower

capacity catches up to demand

• Pricing power falls

r at • Restricted labor supply; high and rising wages

ed • Higher and more differentiated cost of capital

enter ty

• Slower-growing, more crowded markets reward those who can control costs

ty and develop durable competitive advantages

17

Implications fo

• Strong Chinese commodity growth is far lower; volumes a

• Markets for consumer goodsfaster than many expect; but cy p ;

• Financial liberalization will cforeign portfolio investors; bu

• Chinese capital goods / inframore foreign business as dommore foreign business as dom

r Latin America

demand will remain, but the and prices will be stable

s and services will expand competition will be fiercep

ontinue, with benefits to ut progress will be gradual

astructure firms will seek mestic market slowsmestic market slows

18

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