China: Economy stabilised but risks obvious – Rabobank

According to estimate of Rabobank analysts, China’s economic growth is currently around 4½ per cent, significantly lower than the more than 6¾ per cent officially reported and while the situation appears to have stabilised for now, but there are obvious risks.

Key Quotes

“One example is the overstrained housing market, which is not limited to the major cities ﴾known as the tier 1 cities﴿ such as Shanghai and Shenzhen. In the slightly smaller cities as well ﴾known as tier 2 and tier 3 cities﴿, we see that prices are rising much faster than would be expected on the basis of fundamental factors. The strong rally in house prices is mainly due to the fact that the housing market is seen as the only profitable and relatively risk‐free investment opportunity, especially since the stock market collapsed in September last year.”

“The original and highly successful export‐led growth formula has to be gradually converted into growth driven by domestic demand. This is happening, in fits and starts. Chinese policymakers are currently involved in a balancing act whereby they have the difficult task of reforming the economy without causing economic activity to slow too much.”

“Slower growth is a problem for Chinese policymakers. Many new jobs have still to be created in the market sector, while many government businesses in traditional sectors such as steel and coal are undergoing reorganisation. Growth of 4½% per cent is too low for this transition, but the question remains whether they can maintain even this current lower growth rate. There is a threat of serious trade frictions with the US in the near future. In the longer term, Chinese growth will be undermined by a problematic demographic structure. Due to its long‐maintained one‐child policy, China has one of the fastest ageing and contracting populations anywhere in the world. The transition to a market economy is meanwhile far from complete. The upshot is that China will be a source of uncertainty in the coming years and will certainly not be a driver of the global economy.”