There is little doubt that China’s economy has started to turn the corner.
Consider statements from Chinese policy makers themselves. Last autumn, when the crisis broke, China appeared worried and inward looking. Contrast that with the mood through the first half of this year. China has been proactive and forceful.
In my opinion this reflects inward confidence about the ability to overcome domestic economic difficulties and to make the policies work at home. And in turn this has provided world leaders, and particularly Asian policy makers, the assurance they were seeking from the world’s leading growth engine of recent years.
Undoubtedly, the US, Europe and Japan are still the biggest drivers of the global economy today. However, these economies are likely to experience slow growth for many years to come, leaving Asian economies in the lookout for alternative engines.
While China lacks the absolute size needed to offset the dramatic slowdown in the developed world, we believe it will play a greater role in the economic fortunes of Asia. We expect the economy to rebound to an 8 per cent growth in 2010 after slowing to a still enviable rate of 7.4 per cent this year. And as China rebounds, it will lift the rest of the region in varying degrees.
Hong Kong, Singapore and Taiwan are in the best position to gain from Chinese mainland’s recovery due to their close linkages with the mainland in terms of trade, tourism and capital flows.
Just take tourism, for instance. Hong Kong is the biggest beneficiary from the growing numbers of mainland tourists venturing abroad. The city attracted 16 million mainland visitors in 2008, equalling 57 per cent of its total tourist arrivals last year. Korea, Singapore and Japan each welcomed more than 1 million Chinese tourists, which exceeded 10 per cent of their respective annual total visitors.
The warming of cross-strait ties between the Chinese mainland and Taiwan is expected to lead to a surge of mainland tourists into the island. Taiwan is targeting more than 3 million mainland tourists by 2012, up from 330,000 in 2008. The only constraint is the lack of infrastructure to welcome the flood of tourists. Clearly, big investments in tourism infrastructure are in the offing.
This does not mean that the rest of Asia will miss out on a China rebound. Indonesia’s natural resources sector should be able to capitalise on an expected infrastructure-led boom in the mainland. Vietnam is another country which should stand to gain from the shifting out of low-cost manufacturing from China.
Many observers question whether China will be able to pick up the slack from the slowing Western economies. The American consumer is $10 trillion in size, they say, whereas China’s consumption amounts to $1.6 trillion. In that sense the Chinese consumers cannot compensate for their US counterparts.
Perhaps they can. US consumption will fall by $170 billion this year whereas China’s consumption will rise by $115 billion. As a result, in the year when China is not growing at potential, its consumers will make up for two-thirds of the fall in US consumption.
Secondly, the potential for Chinese consumption is underestimated. It is true that China’s exports have been hit hard, causing widespread job losses in the export-oriented zones along the coastal regions. But other regions are growing strongly, particularly central and western China, and domestic consumption remains stable.
While there has been much coverage of the international imbalances, China has been working on its own imbalances: a. coastal imbalances b. rural imbalances c. social imbalances d. environmental imbalances and e. international imbalances.
The authorities have talked of bringing about a harmonious society and scientific development. Some progress has been made to achieve this goal. In particular, the authorities are trying to boost rural spending on white goods and durable items.
Some figures suggest this is starting to make a difference: some 920 billion yuan ($135 billion) will be spent on these goods in 2009. That is about 4 percent of the national income. In our view, consumer spending will continue to rise in China and provide a stimulus for the rest of the Asian region.
In addition, one of the most significant developments is the decision by the Chinese government to provide an expanded social welfare safety net. This will take time. But it will lead to a reduction in precautionary savings and increase in consumption.
Indeed, this later aspect is not just true for China. Asian Development Bank President Haruhiko Kuroda has recently highlighted the importance of social safety net as a factor behind Asia’s attempts to domestically drive economic growth.
Finally, and perhaps most significantly, China can help the rest of Asia escape a prolonged downturn through its growing trade ties with its neighbours. In recent years, intra-Asian trade has risen significantly. China is at the centre of this trend.
Exports to China from other countries in Asia are either consumed directly in China or re-exported. About 60 per cent of Asian exports has destination in G7 countries. As a result, the reprocessing extent of China’s trade can be underestimated. But one should not overlook domestic consumption in China.
Late last year, the Hong Kong Monetary Authority carried out research breaking down exports to China from other Asian countries into those that were re-exported from China and into those that were consumed within China.
The research revealed that Vietnam sends 7.1 per cent of its exports to China, and all of these are consumed within China. Of Indonesia’s exports to China, 70 per cent are consumed within China. For Korea, 50.4 per cent of its exports to China are consumed within China. For Singapore the figures are 50.3 per cent, for Malaysia 49.2 per cent, Thailand 47.3 per cent and for the Philippines, 39 per cent of their exports to China are consumed there.
These are positive indicators as Asian economies search for a bulwark against the global downturn. For sure, Chinese consumers are no substitute for the US and Europe. At least,not yet. But the trend is unmistakable.
The author is CEO and Executive Vice Chairman, Standard Chartered Bank (China) Limited