It is no secret that China is a major influence on the global economy. The reforms started in 1978 by leader Deng Xiaoping have helped China become the world’s fourth largest economy after USA, Japan and Germany. Some economists predict it may become number one in the next 20 years.

Can the miracle continue or is China out of control and heading for a crash?

Some facts
As China rebuilds its infrastructure after years of neglect it has become a massive consumer of resources. In 2005, China was the biggest consumer of aluminium, iron ore, copper, nickel and steel and the second biggest consumer of oil.

It has become the manufacturing hub of the world making 70% of the world’s toys, 60% of textiles, 60% of home appliances, 50% of shoes, 35% of mobile phones and 34% of computers. Exports have grown at over 20% for the last 20 years and 40% in 2006.¹

China now has foreign reserves of $1.5 trillion equivalent to 22% of world’s reserves (excluding gold).²

There is currently a fast growing middle class of consumers that is expected to grow to 520 million by 2025³. Many foreign retailers are gearing up to sell clothes, furniture and phones to this vast market.

Spending on power generation and infrastructure must continue for many years if the Chinese Government is to achieve its aim of bringing a further 177 million people out of poverty in the next ten years³.

Some concerns
Any country expanding at over 11% a year will have growing pains. Inflation is over 4.4% the and People’s Bank of China has raised interest rates and controls over banks to peg inflation back. However many of the spending decisions are made at a local level and central controls are weak.

State enterprises have been reformed but they are still inefficient. Over 30 million workers were retrenched between 1998 and 2004⁴ but there are worries that further reform will only add to social unrest. Not all Chinese have benefited from the economic miracle and there is a rising divide between the haves and have nots.

The Chinese economy is unbalanced relying too much on public and foreign spending. Chinese are very frugal and it is estimated that on average they save 25%⁵ of their income but retail sales are at last starting to rise as consumers get a taste for a higher standard of living.

Pollution remains a problem as does a backlash from domestic producers against China’s success in importing cheaper goods to their country.

One of the interesting developments is ‘Gugai’ or reform of the share market. As the economy matures a better managed share market could open up opportunities for overseas investors. Only time will tell.

¹ Sources: CSFB, August 2005, Bloomberg, February 2006.
_² Source: Bloomberg.
³ Source: ‘Serving the new Chinese consumer’, The McKinsey Quarterly 2006 Special Edition, ‘The value of China’s emerging middle class’.
⁴ Source: Economist Intelligence Unit, Country Profile 2006, China
⁵ Source: ‘Serving the new Chinese consumer’, The McKinsey Quarterly 2006 Special Edition, ‘The value of China’s emerging middle class’.