In a recent report, Credit Suisse’s strategists wrote that they are “moderately bearish on China,” and said growth will end up falling to 7% (lower than the bottom-end of the consensus range of 7.6%). According to CS’ team, the six main drivers of Chinese growth over the past decade are diminishing. Here is why:
(1) A high investment share of GDP. China’s growth over in recent years has been driven by ever-increasing levels of investment (the investment share of GDP, at 46% of GDP, is now the highest for any country on available data). However, under the 12th 5-year plan, China’s policy makers are trying to rebalance growth, away from investment and towards consumption;
(2) A low cost of capital. China’s investment-led growth was financed by an implicit tax on households in the form of an artificially low cost of deposits, which gave its corporates access to very cheap bank funding. However, we think the weakness of deposit inflows, the opening up of the capital account and the political commitment to deregulate the banks and boost consumption is likely to lead to higher real deposit rates – and, hence, a higher cost of capital;
(3) Excess labour. In past decades, China has established itself as the manufacturing hub of the world on the back of a large supply of low-cost workers from its rural hinterlands. However, China’s new supply of manual labour has now turned negative. There are many signs of Chinese companies relocating part of their supply chain to other, lower-cost Asian countries (Vietnam);
(4) A cheap currency. China has boosted its export growth by artificially weakening its currency. However, the Yuan has already increased by 7% against the dollar over the past two years – and the political commitment to higher levels of consumption as well as political pressure by the US is likely to lead to further currency strengthening;
(5) Entry into the WTO. China’s growth was boosted by its entry into WTO in 2001, opening its access to global markets. No similar boost to growth looks likely in the future;
(6) Housing. Housing activity contributes directly 10% of GDP and indirectly another 10%, according to our head of China economics, Dong Tao. However, housing’s contribution to growth clearly appears to have peaked.
Source: Credit Suisse