China’s Economy: Entering New Phase
China’s economy has undergone over 10 quarters of drop since the fourth season in 2010 with up and down in between. What gives rise to the long period of economic falls? The cause lies on structural adjustment other than periodic change. Key factors that fueled China’s economic growth are under drastic changes compared with those three decades ago, which are concluded as:
First, drops of overseas demands. Past domestic economy was driven by export, yet global economy has been going through a consistent downturn after international global crisis blasting in 2008, which indicates a shrinking export market. As experts estimated, depression of global economy shall last for at least eight years or longer, so export-driven economy in China must be altered.
Second, rise of labor costs. Competitiveness of domestic manufacturing industry lies in low costs, in particular labor costs. However, statistics data shows that over 70% of young peasants under the age of 25 have poured into cities, which means the available labor force in future is limited. As annual salary growth for migrant workers reaching over 20%, a large proportion of companies are seeking overseas investments by transferring manufacturing devices and production capacities to countries with cheaper costs.
Third, investment-driven economic growth cannot do with falls in saving ratio out of aged tendency of population. The 6th National Population Census shocked people by calculating the tendency of aging population more serious than what had been expected. Last year, China saw the first round of reduction in terms of labor force newly entering the market by 0.6 percentage point or by 3.45 million people, which shall be continuously decreased in days to come. Such constitutes the backdrop of consistent rise in labor costs. In the same time, dependency ratio ascends with aging population boom when saving ratio declines with more people consuming food and fewer people working. Drops in saving ratio indicate the end of large-scaled investment-driven economic growth pattern, composing important changes compared with that of three decades ago.
Fourth, economic growth by consuming resources should be altered with gradual intensity in energy and resources. Past economic growth was resource-consumable and hostile towards the environment. Such an economic pattern must be put to a cease with its pollution in the environment, an example of which is the big haze earlier this year in Beijing.
Those four factors constitute big changes compared with that of three decades ago, marking China’s economy entering into a new phase. An important symbol is the potential economic growth rate at 7% to 8% in the future instead of over 10% of annual rise.
With slower economic growth, why policies do not make adjustments to changes? Two reasons can give answers, firstly, the structural transformation, unlike periodical ones, cannot be solved by means of short-term policies and secondly, there is no need to do so, for employment rate does not confront drawbacks as macroscopic economy would be stabilized after full employment. The reason that we set a growth rate at over 8% in 2008 lied in securing employment, otherwise of which over 20 million migrant workers would go back to rural areas from coastal cities. Drop of economic growth rate at around 7% would not badly hurt employment at present, as is reflected from the case that 100 employees are hunting for 110 posts calculated by recruiting websites in total.
So there’s no need to provide more fiscal stimulus this growth rate. To some degree, China has entered the post-industrialization, and then what are its new impacts on the financial field?
On entering the new phase, it depends on demands instead of supplies to fuel the economic growth, and industrial structure shall sheer off to the tertiary industry dominated by industry. Shortage of capital in medium and small enterprises ensures progress of PE or GEM in China. The core of financing difficulty confronting the progress of medium and small enterprises in all developing countries goes to mechanism of supplementing capital funds. Traditional business financial organizations cannot satisfy its liability requirements. Liabilities shall naturally expand with growing scale in companies in the middle and later period of industrialization that give rise to new claims for consolidating corporate assets and liabilities.
By far, China boasts of sound channels for gaining capital by external investment, PE, IPO and so on. Yet channels to gain loans are quite limited, and mainly depend on mortgage from banks while banks have restrained capacities for long-term loans out of its own characteristics. Companies have no channels for gaining long-term loans as their scale grows, then how to solve such an issue in the new phase becomes a new question wrestling them.
However, the replacement of loans by debt financing becomes a new tendency in the past few years. When the rate for issuing bonds grows faster than that of loans, ratio of loans among social financial scale declines together with continuous rise in such bonds as including transparent bonds and shadow banking system. In my opinion, it’s the new phase of China’s economy that requires more debt financing, and such changes conform to adjustments of enterprises’ balance sheets.
Besides, post-industrialization also stand for China’s entering the middle income society with its per capita annual revenue at 5400 USD, higher than 4000 USD set by the UN standards. Risk preference of residents might witness changes when deposits mean money saving for the future with interests as added proceeds. Since people have spare money, they would seek for investment channels besides daily consumption, yet those money cannot gain high returns in banks, so they begin to adore the high profitable financial products by consuming certain risks. Many depositors become clients of banks with their deposit serving as various finance products.
As new changes occur in the new phase, interest rate liberalization is pushed forward for quickening its pace and banks are undergoing transitions. Banking transition, in macroscopic perspective, is called financial disintermediation, which means a change of financial structure to market-oriented direct financing from the past indirect financing with deposit and loans as the main source. One vivid achievement of financial disintermediation is rapid growth of bond market in China, seizing a quota over 50%. One misinterpretation is that people would regard capital market as stock market, yet capital market incorporates two hedging markets of bond market and Stock Market.
With comparatively completed bond varieties, we also witness a rapid growth in this term. In the past seven years, the annual compound growth rate of domestic bond market exceeds 30%. Social financial scale underwent drastic changes in the late 2008 with bond volume totaling 1.03 billion Yuan that grew to 1.33 billion Yuan, 1,63 billion Yuan and 2.21 billion Yuan respectively in 2009, 2010 and late 2011. Since corporate structures of assets and liabilities do not entirely rely on banks, banks, facing high pressures, begin to seek for transitions to get adapted to the market variations. Monopoly of banks, in this sense, is weakened. For financial sectors, financial disintermediation speaks for its intrinsic attribute. Financial institutions, no longer what was alleged as ‘accumulating money’, begin to rely on various financial products to control risks with risk configuration as its core.
Originally published on Southern Metropolis Weekly | 2013-7-21
