By Craig Russell
Over the past few months, we have witnessed the most concerted global effort in history to bail out the world economy. However in the process, more questions have been raised than answered. The impact of what started out as the subprime crisis has left many market watchers floundering in uncharted waters.
One of the biggest concerns is if we are in for a global depression. We believe that China will be the deciding factor between a recession or depression. The global financial system will be supported as long the Chinese consumer continues to spend at an increased rate.
• According to the World Bank and the IMF, China is the world’s third largest economy with a GDP based on PPP (purchasing power of parity) at between US$6.9 trillion and US$7.05 trillion in 2007.
• The Chinese consumer accounts for roughly 42 per cent of GDP. Comparing it to the US and India whose consumption stands at about 70 per cent of the GDP, Chinese consumption still has room for growth.
• China’s GDP per capita is between US$5200 and US$5400 based on purchasing power parity. (Source: World Bank and the IMF)
• Q3 saw a net capital outflow of roughly US$1.5 billion from the mainland versus an inflow of US$170 billion in first half of 2008.
• The country has nearly US$2 trillion in treasuries and cash, 20 per cent of spending in the mainland comes from the central government.
It is safe to say that a recession and massive drop in consumer spending in the West, which has been on a ten year consumer spending and borrowing binge, has already begun. Third-quarter GDP for the United States declined by 0.3 per cent. Although much better than the anticipated 0.5 per cent, it is still a clear indication of a recession in the USA.
Despite the bleak outlook for the US, consumer spending in China is rising. In 2007, Chinese consumer spending in 2007 increased by 17 per cent compared to 2006, and 16 per cent in 2006 compared to 2005. There are concerns that the dip China’s GDP growth in the third quarter to nine per cent marks a slowdown in the economy. However, this should be seen more as a “moderation” in GDP and not a “slowdown”. It was the goal of the People’s Bank of China (PBoC) last year to moderate growth to the nine per cent level this year, and they achieved this aim.
It has been about 30 years since China embraced market reform. We now have a mature Chinese consumer with access to and aspirations to live a lifestyle similar to those of Japan, Korea or Singapore.
The Chinese household is moving to another level of spending. Gone are the days when basic needs such as food and shelter were the priority. We now see the demand shift to value added items such as electronics, household electrical appliances (white goods), automobiles and other luxury items.
The Communist Party of China recognises this increase in domestic consumer spending. On 29 October, the People’s Bank of China cut local interest rates by 0.27 per cent. This is the third cut since 15 September and more cuts are expected in the future. The spotlight is now on the consumer and domestic spending. We expect no movement or repegging of the yuan, with it remaining at 6.84 yuan to a US dollar, with the possibility of a one per cent increase or decrease over the next six to eight months. The stability in the currency will also contribute to stable prices on imports and exports.
In view of this, we should see consumer spending in the mainland continue to rise by 15 per cent over 2007. This would equate to about US$300 billion to US$400 billion in real spending.
Taking that into account, the Chinese consumer spending growth could equal 0.6 per cent to 0.9 per cent of the Global GDP, which stands at about US$50 trillion, and that is likely to keep the globe out of depression.
Craig Russell, Chief Market Strategist, Saxo Bank Group