- Sustaining economic growth.The Chinese economy has been remarkably successful in lifting GDP per capita in its catch-up phase, which has made China a key driver of global economic activity. There are, however, growing fears that China’s transformation process is encountering delays and that a hard landing is unavoidable. We do not believe that a hard landing is taking shape, but we do not underestimate the challenges either. As the authorities implement an ambitious reform agenda, which includes urbanisation as well as reforms in the financial sector and in state-owned enterprises, they have pledged to “fine-tune” policy should the economy need support. This suggests a modest growth path in the coming years, but a more sustainable one than in the past. For the global economy this means a leaner China with changing demand, as consumption becomes more prominent. Growth opportunities in China will have to be reassessed.
- Urbanisation at the centre of the agenda. We think that a reform package that centres on a new form of urbanisation, different from the path taken the past three decades, provides the best chance for unleashing a surge in domestic demand and more sustainable growth. This time, however, local governments will not have easy credit to promote urbanisation, nor will state-owned enterprises invest in the property sector. Instead, the authorities will have to focus on cost sharing among the central government, local governments and those rural communities planning to migrate to urban areas. In any case, China is envisioning the largest population transfer in history, a development which will not go unnoticed. This is a new environment of opportunities for companies embarking on this strategy.
- Turning migrant workers into consumers. A main driver in the urbanisation process is the hukou reform, or urban household registration. Although slightly more than 50% of the population is now living in urban areas, only 35% of the population has urban household registration. Registration allows migrants to buy urban properties, receive education and health and reach their consumption potential. According to recent surveys, over half of the migrant workers would like to settle in urban areas. In 2012 there were 262 million migrant workers. So far the largest flow of migration is in the western regions, where manufacturing and services firms are settling to take advantage of lower wages. As these labour pools gain higher disposable incomes, this should become an important driver of consumption.
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