China Economic Outlook March 2011


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Strategy session presentation on China's economic outlook. inflation, labour shortages and the economic bubble in China and examination of economic, political and social issues.

Published in: Business, News & Politics
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China Economic Outlook March 2011

  1. 1. Economic, Political and Social Risks and issues <ul><li>Inflation, Labour Shortage & the Bubble Economy in China </li></ul>
  2. 2. <ul><li>2010 a year of recovery – albeit uneven </li></ul><ul><li>Tale of two worlds – buoyant East and sluggish West </li></ul><ul><li>How resilient is the recovery in the West – as the policy stimulus wears off? </li></ul><ul><li>How sustainable is the recovery in the East – especially if West stays weak? </li></ul><ul><li>Inflation will be an issue for a number of emerging economies </li></ul>Global Issues Ahead
  3. 3. Tale of Two Worlds in 2011 <ul><li>High growth rates in Asia will be coupled with inflation pressures on asset prices, commodities and food. </li></ul><ul><li>The West – rise in commodity prices offset by domestic decreases in prices and values. Large firms will look to the East to invest. </li></ul>
  4. 4. Global Economic Summary <ul><li>Positive trend of global rebalancing – global economy on an upward path, but there will be challenges </li></ul><ul><li>West still accounts for a considerable portion of world economy – there will be problems if Western countries demand for products remain low </li></ul><ul><li>Emerging Markets account for 1/3 of global economy but 2/3 of growth. This trend will continue and will be positive </li></ul> Source: Standard Chartered Bank
  5. 5. Key Risks and Issues in China <ul><li>Inflation, Labour Shortage & the Bubble Economy in China </li></ul>
  6. 6. Health care and social safety net <ul><li>Largest concern </li></ul><ul><li>Unofficial migrant workers not covered (~40%) </li></ul><ul><li>Elderly are increasingly not living with their decedents and more likely to be concentrated in the countryside which has insufficient resources </li></ul><ul><li>“ I figure everything will be O.K unless you get a major illness… if that happens to me and I can’t take care of myself, I’ll just have to end my life” </li></ul>
  7. 7. Health Care and Social Safety Net <ul><li>Death rates from chronic diseases on the rise due to changes in life styles and increased use of tobacco </li></ul><ul><li>Number of doctors not keeping up with population, qualifications are modest and the geographical distribution does not match needs </li></ul><ul><li>Half a billion mostly rural Chinese are not covered by social security system at all </li></ul>
  8. 8. Potential Pension Crisis <ul><li>Proportion of elderly in China growing faster than any major country </li></ul><ul><li>Number of retirees to double by 2015 to 200 million. </li></ul><ul><li>By 2050, 430 million retirees or 1/3 of total China population </li></ul><ul><li>Huge burden on families (single child) to care for aging parents </li></ul><ul><li>Ratio of workers to retired will go from 6 to 1 currently to 2 to 1 by 2040. </li></ul>
  9. 9. Income Stability <ul><li>2 nd largest concern </li></ul><ul><li>30% of recent university graduates are unemployed </li></ul><ul><li>State obligations to “legacy pensions” plus more recent obligations amount to over 1.5 trillion USD </li></ul><ul><li>Government has used payroll taxes to fund previous generations pensions rather than investing </li></ul>
  10. 10. Rising Wages and Labour Unrest <ul><li>Higher wage demands and better working conditions with a tightening labour supply and increasing cost of raw materials </li></ul><ul><li>Minimum wages have increased 12 to 20% across China in 2010 </li></ul><ul><li>153 million rural migrant workers </li></ul><ul><li>Increased costs due to minimum wage increases, limits to hours worked and social security legislation </li></ul>
  11. 11. Grey Economy <ul><li>China’s households hide as much as US$ 1.4 trillion of income (of which 80% is accrued by the country’s wealthiest people) </li></ul><ul><li>The average disposable household income in China is US$ 4,866 a year or 90% more than official figures. </li></ul><ul><li>The top 10% of China’s households take in $21,035 more than triple official figure </li></ul>
  12. 12. Inflation and Rising Food Costs <ul><li>Consumer prices increase 4.9% in January 2011 over 2010 and were 10.3% higher than December 2010 </li></ul><ul><li>Cost of vegetables for first 10 months of 2010 increased 20 to 30% </li></ul><ul><li>Food prices rank as the country’s 3 rd largest concern </li></ul><ul><li>Some families are spending half of their income on food </li></ul>
  13. 13. Inflation and Rising Food Costs <ul><li>Demand is outstripping supply </li></ul><ul><li>Government is having to subsidize students and the poor </li></ul><ul><li>Drought will make it worse </li></ul><ul><li>Could lead to social instability </li></ul>
  14. 14. Property Prices <ul><li>Prices continue to increase in 68 of the 70 major cities in China, with 10 experiencing double digit growth </li></ul><ul><li>High proportion of investment and wealth in property – potential bubble </li></ul>
  15. 15. The 12 th Five Year Plan (2011 to 2015) <ul><li>Balance wealth distribution </li></ul><ul><li>Transform the economic development strategically </li></ul><ul><li>Improve social infrastructure </li></ul><ul><li>Enhance environmental protection </li></ul><ul><li>Expansion of overseas investment </li></ul><ul><li>To make Shanghai an international financial centre by 2020 </li></ul><ul><li>Reform taxation policies (income tax, VAT, business tax, property tax, consumption tax, resources tax, transferring prices etc. </li></ul>
  16. 16. Focus on Domestic Consumption <ul><li>Faster domestic demand to offset slowdown in exports </li></ul><ul><li>To become a key driver of the Chinese economy </li></ul><ul><li>China working to rebalance its economy with a greater focus on the service sector (42.6% of China GDP in 2009 compared to 70% in the US but up from 20% in 1990) </li></ul>
  17. 17. Government Response to Potential Dissent <ul><li>Censorship </li></ul><ul><li>Potential overreaction to events </li></ul><ul><li>Tighter restrictions on citizens and businesses </li></ul>