China: Beyond The Miracle

China: Beyond The Miracle

03/10/2013 20:04 -0400

by Larry Kantor, Head of Research, Barclays,

China has become a key locomotive for global growth, in many ways taking over the role traditionally played by the United States in business cycles. It is now the world’s second largest economy, and has grown much faster than any other major economy over the past couple of decades.China’s role as a key driver of global growth brings with it increased scrutiny by investors and economists: a significant slowdown in China – never mind a collapse – would have significant implications for economies and financial markets around the world. This was most recently seen in 2012, when slower economic growth – fostered in large part by policy tightening to alleviate inflation pressures and structural imbalances – generated fears of a “hard landing” that served as a headwind to financial market performance for much of last year.

The extremely rapid growth in China – as welcome as it has been during an otherwise disappointing recovery from the Great Recession – represents the first stage of development in the evolution of the economy from closed to open, from fully controlled to market, and from agrarian to industrial. This initial stage is already giving way to a new phase of slower, more sustainable growth, with different drivers. It is critical for the global economy and financial markets that China’s transition is managed in a way that allows the necessary adjustments to happen gradually and without de-stabilizing effects.

The Beyond the Miracle series – written by Barclays Yiping Huang, Jian Chang and Steven Lingxiu Yang and launched in September 2011 – carefully analyzes the transition that China is undergoing from various perspectives, and also discusses the economic and financial market implications. It argues that China will successfully make the transition from ‘economic miracle’ to normal development in the next decade (Chapter 1). But there is an important caveat: China must embark on a multi-pronged set of reforms if the country is to move to a slower, more sustainable growth rate that deemphasizes trade, construction and investment and instead places a greater weight on consumer spending as a source of growth.

Each chapter provides an in-depth analysis of the task at hand – from financial reform (Chapter 2), to housing reform (Chapter 3), to the pivotal role of consumption in rebalancing China’s economy (Chapter 4). For China to avoid becoming a source of inflation in the future, its monetary policy-making, too, will need to be reformed (Chapter 5). China’s ageing population will also mean an end to its surplus of cheap labor, heralding a new era of rapidly rising wages (Chapter 6). In turn, this could put additional pressure on the country’s fiscal outlook, as it seeks to meet growing pension liabilities (Chapter 8).

These challenges notwithstanding, the Beyond the Miracle series is optimistic on the outlook for China. It argues that the Chinese economy is in the middle of a major and broad-based structural transformation that will lead the country to a more sustainable growth potential of 6-8%, from a double-digit pace previously. As China continues to grow and upgrade, its outward direct investment should rise quickly (Chapter 7). And by narrowing the technological gap with the advanced economies, China should be able to avoid the “middle income trap” and graduate to the global high-income group within the next decade (Chapter 9).

China’s Beyond the Miracle series is ambitious, both in scope and depth. Given the critical role now played by China in the world economy and financial markets, I highly recommend it as essential reading for investors, as well as anyone interested in current and future economic and market trends. Everything you wanted (and need) to know about China but were afraid to ask…

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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