Dynamo keeps powering on

Published: 25 June 2009

When China's first quarter figures were released showing the decelerated GDP growth of 6.1 per cent year-on-year, some felt sceptical about the relatively upbeat economic outlook attained by China's nine per cent GDP growth last year. But when domestic demand in April showed signs of further strengthening and China's investments reached their highest since March 2004, China's tendency to slip into recession became short-lived.

In this section a year ago, HSBC Chief Economist for China Qu Hongbin gave a positive economic outlook for China in 2008. Here, Mr Qu gives his forecast about the country's outlook – referring to the same questions as in last year's session, and a few new ones. His key points from 2008 are in italic – click to see last year's response in full.

How do you view the outlook for investment in China?

May 2008 - We're very bullish and confident about China's long-term outlook. We believe China's economy will continue to grow at around 8-9 per cent per year for the next decade.

2009
We are still quite bullish in terms of China's investment outlook this year for a number of reasons. We know that, since the outbreak of the global financial crisis, China has been taking serious actions to manage negative shocks from the global demand. The growth in Chinese exports has slowed down dramatically from an average growth rate of 25 per cent in five years until mid-2008 to little growth last October.

In the first quarter this year, Chinese exports contracted by 20 per cent. In order for the Chinese government to offset the negative impact of this big slump in Chinese exports, it launched a big fiscal stimulus package in November 2008. The Chinese central bank also started to ease credit policy and, as a result of this policy stimulus, growth in China's infrastructure investment started to pick up strongly.

In the first quarter of this year, growth in Chinese infrastructure investment picked up to almost 50 per cent year-on-year, which is a very strong number. As a result, growth in China's total fixed investment also accelerated to nearly 30 per cent in the first quarter from around 20 per cent in fourth quarter last year. This is a clear sign that China's stimulus package is starting to take effect. Once construction work on more infrastructure projects starts, the recovery in Chinese investments will continue to gain momentum. Moreover, we also see evidence that both housing and car sales in China have started to pick up. Starting April, car sales rose by 25 per cent year-on-year. A combination of the stimulus package, recovery in property market and car sales will likely fuel investment growth going forward. This is likely to lift China's economic growth to over eight per cent in the second half of this year.

In 2010, total investment is expected to remain at 20 per cent, the same as the outlook for 2009. How do you view this unchanged figure?

The 20 per cent increase is quite a strong number given the current environment. This 20 per cent is mainly driven by infrastructure investment and also the recovery of property market. I think the 20 per cent growth in investments for this year and next year is going to be quite positive for China's overall growth.

How will China's growth benefit other markets?

China's infrastructure investment-led recovery is likely to create a new demand for machineries and materials. Since China relies on imports for raw materials, countries who can supply China the materials, sophisticated machineries and commodities are likely to be best positioned to benefit from these. In other words, China's strong investment will have a spill-over effect to countries that can provide China with resources.

How has China's economic growth been affected by the current turbulence in the global financial markets?

2008 - Cyclical swings, tight credit, slowing growth.

2009
Clearly, China is not immune to the global financial crisis. The impact of the global financial crisis was felt by China's exports. We all know that China has become a major platform for manufacturing for the global market. The major slump in global demand starting second half of last year has taken its toll on China's exports sector. China's overall GDP growth rate fell to around six per cent from its previous 10 per cent. But the Chinese government's relatively strong fiscal position allowed it to introduce the stimulus package in order to cope with this impact.

Has the control exerted by policymakers over the economy been able to contain inflation, continue market reforms and mediate external shocks?

2008 - Public spending will cushion the slowdown.

2009
There are two levels of work that the government has done and will be doing in order to cope with this global crisis. The first level is the government's effort to think of the necessary steps to stimulate demand to offset the negative impact. The overall objective of this is to maintain reasonable growth for the economy.

There's also another level of government action. It is mainly a structural reform to better deal with the external shock. For instance, the government has introduced a three-year plan to overhaul the medical care system in China which requires more than 100 billion dollar spending in the medical system. The government also increased spending in areas such as education and rural infrastructure projects.

Those are middle- and long-term policy initiatives to improve the social welfare system so that the Chinese consumers can be more comfortable to spend a little bit more. That would help China transform growth to be mass-demand-led rather than relying too much on the export sector. China has also been trying to diversify its export market away from the US and more towards the global emerging markets. On that front, the government is trying to cooperate with other emerging markets like Latin American and Middle Eastern countries to increase China's trade with them so China will be able to explore new opportunities. We are seeing more policy actions on that.

Would the stimulus package be able to initiate sustainable economic recovery?

In the near term, the fiscal stimulus will be able to boost investment. There are some concerns on how long this fiscal stimulus can sustain growth. China needs to focus more on the policy initiatives so the consumer spending can play a bigger role in driving economic growth. This consumption will be a bigger source of inner growth once the stimulus project gets completed.

Is inflation in China likely to prove a disincentive to foreign investors?

2008 - No.

2009
In the near term, inflation will not be a problem. Commodity prices have been falling sharply as well as food prices. Even if growth recovers in the second half of the year, it will still be around eight per cent, much lower than previous year's 12 per cent. Though growth is going to be stronger, it will not increase the risk of overheating.

Has there been a drop in investments from companies manufacturing for export?

2008 - Foreign investors must look at the China market and the global one together.

2009
Yes, the global demand has been contracting. Export orders have been declining. As a result, manufacturing investment has been slowing. We are also seeing that FDI inflow is slowing. As long as the global demand for Chinese exports remains weak, manufacturing investments will continue to slow. Meanwhile, the drop in manufacturing sector has been compensated by infrastructure investments in the second half of the year. Thus the total investment in China will continue to accelerate. The efforts of the government to diversify its export base will help put China's manufacturing capacity in use. It will be able to ease the pain of the sector but in the near term the increase in these new markets for Chinese exports will not be sufficient to totally compensate for the export orders from the US and other major export partners.

How do you see the role of China among emerging markets?

2008 - Increasing integration of trade and capital flows between China and other global emerging markets.

2009
It looks clear that China is the first among major economies to recover from the global financial crisis. China's recovery is led by strong investment spending thus creating new demand for materials and commodities. For commodity exporting nations, the gain will not just come from China's rising imports, but recovering commodity prices will also improve their terms of trade. This, in turn, will help those economies to cope with the financial crisis and enable them to buy more Chinese manufactured products. Together with China's latest initiatives to strengthen trade and investment links with Latin America and the Middle East, we expect trade cycling between China and other main emerging markets to rise, setting the stage for a new world trade order.

The extent of the global financial crisis remains unknown. How soon will China recover?

China has already recovered despite the uncertainties in the global economy and this is driven by the impact of the stimulus package. The recovery will continue to gain momentum once more of the stimulus-related infrastructure projects start.

What other challenges will the Chinese economy face in the near future?

2008 - The environment; energy and resources; income inequality.

2009
The environment and energy and resources continue to be a challenge. The global demand has been much lower now. In previous years, the global economy grew strongly, not only China, and there was competition for these limited resources. Now as the global growth is much slower, this leaves more room for China to grow. China needs to improve the efficiency of energy it uses as well as its environmental protection efforts. These are the long-term challenges that China needs to deal with.