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Specialists from HSBC remain bullish on China, on the premise that consumption will fuel the country’s future growth.
Recently, we have reported on CLSA’s view that the strength of fixed-asset investment indicates China’s growth is set to continue, as well as a theory put forward by Societe Generale that China’s attempts to suppress volatility could be storing up bigger problems down the road.
This week it is HSBC’s turn to debate which way China’s economy is headed, with the bank’s co-head of Asian economics saying the country’s shoppers will keep the economy in good shape.
Household consumption in China grew by around 17.76% between 2005 and 2010, compared to 14.28% in India, 3.86% in the US and 2.38% in Japan. Crude oil consumption has also increased by 6.76% during the past five years, in contrast to developed countries, which have recorded a decline during the same period.
Against this backdrop, Hongbin Qu, HSBC’s co-head of Asian economics and research and Greater China chief economist, is confident that the government’s focus on encouraging consumption, rather than relying on investment-led growth, is a big positive.
“We all know that the Chinese government has a powerful invisible hand in terms of managing the economy,” he said. “If the government has said something, you had better believe it.”
That much was clear last year when politicians took steps to cool the property market. The China National Development and Reform Commission property price index (month-on-month) decreased from a peak of 1.4 to 0.2 right after the policy announcement in April and only recovered to 0.3 by December 2010.
China’s tax revenue has been growing by 30% a year, which is much higher than its GDP growth, so another option available to the government to drive consumption is to reduce income taxes.
“Chinese consumers save more than 35% of their monthly income,” Qu said, highlighting the high savings rate on the mainland. “If they reduce their saving rate by just 5%, the impact on consumption would be significant.”
However, he added that the savings culture is unlikely to change in the near term. Data from Singapore-based consulting firm Starmass corroborates Qu’s presumption. Despite a compound annual growth rate in urban disposable annual income in China of 17.79% during the past five years, residential savings deposits have also risen at the same rate.
Rising interest rates could also affect China’s consumption, according to Qu, who argued that the government’s tightening policy would harm investments and exports, which will cause earnings to fall and ultimately result in lower salaries. Qu did not see this as a big deterrent to consumption, but the fact that most Chinese families are net savers rather than borrowers means they will not have to shoulder a larger interest burden, rather they will earn more interest income, he said.
A linear regression analysis corroborates Qu’s view that interest rates have a positive significant relationship with household consumption expenditure in China. However, it is difficult to establish a statistical relationship between fixed-asset investment and interest rates. Export trade volumes did in fact increase, rather than decrease, when the one-year benchmark lending rate increased to 6.31% in June this year from 5.81% in January. This suggests that factors other than the cost of debt could be large drivers of exports.
Edmund Chong, who heads sales for the Hong Kong wholesale business at HSBC Global Asset Management, also suggested that consumption would be the next engine for China’s economic growth.
“The millionaire population [in China] has crossed one million to rank third globally, following the US and Japan,” he said. “China’s luxury market is now worth around $13 billion and is expected to grow by 23% per annum to reach around $106 billion and become the largest luxury market in the world by 2020.”
He advised that investors should look outside the domestic market and capture investment opportunities globally (such as luxury brands) that are benefiting from China’s growth.
Commenting on competition, William Tang, who leads the consumer and retail group at HSBC, said that China’s domestic companies can exploit superior local knowledge to give shoppers what they want and are expanding into second- and third-tier cities to capture the market before the multinational firms get there. Tang emphasised during the discussion that China is a huge market even for firms that have been operating in China for a long time, such as McDonald’s and KFC. McDonald’s announced last year it would increase capital spending in China by 40% and build 200 new stores.
Although some economists are expressing concerns about China’s future, HSBC’s panel remains optimistic about China’s future growth. “We see significant investment opportunities in China over the long term,” said Chong.
