There have been a number of bearish reports on the outlook for China’s economy of late, mostly focusing on slowing economic growth and the prospects for reform and the “new normal” of more moderate expansion.
But the latest report, "No More Tiers", from the Demand Institute, a think tank jointly run by the Conference Board and Nielsen, is downright dark in its assessment of the outlook for the world's second largest economy.
It may be called “No More Tiers” but the report certainly contains its share of heartbreak.
“China’s economic prospects are uncertain,” it begins, pointing out how the growing debt burden of government and corporates, falling productivity, inefficient investment and a lagging reform process are all “cause for concern”.
“Many analysts once forecast a soft landing for the economy after more than 35 years of breakneck growth, but that landing point is still not in sight,” the report said.
The analysts believe Beijing will use policy instruments to stop a full-on crisis, but China is facing a longer period of slower growth, some 4.5 per cent gross domestic product growth on average between 2015 and 2020 if the government is able to "stave off disaster through policy mechanisms".
The line that has rattled nerves focuses on productivity.
“China’s productivity crisis – the result of both institutional deficiencies and a maturing economy – remains unaddressed. For these reasons we believe China is facing a protracted period of declining growth that will be much longer and deeper than analysts may have predicted.”
A bright spot, and the focus of the report, is consumption, and this is one area that the Demand Institute believes will continue to expand, and at a faster rate than elsewhere.
Even under reduced growth forecasts consumer spending should rise by 5.2 per cent a year to reach 40 trillion yuan (€5.89 trillion) in 2025, up from an estimated €3.48 trillion last year.
Even if growth turns out to be one percentage point lower, annual growth in consumption would still be 4 per cent a year, the report reckons.
Although per capita consumption is expected to rise by two-thirds in the next decade, average consumption will be low, at 28,000 yuan (€4,123) a year, compared to €30,000 a year in the US.
Some 80 per cent of growth in Chinese consumption in coming years will be led by “leading-edge consumers”.
To really fix the economy the government has to reform and restructure debt-laden and unproductive state-owned enterprises, or SOEs, and this is unlikely to happen for ideological reasons.
“It is not hard to understand why the transition to a more market-led economy might be difficult: abandoning China’s investment-led formula for economic growth challenges the very core of the Communist Party’s governance methodology and patronage system,” it said.
It said how “the focus appears to be on fixing the party, fixing politics, fixing society and fixing the economy with a stick rather than a carrot. Hence the reversion to a high level of direct, centralised control and engineered solutions to economic growth and social development,” it says.
The report identifies 40 cities that provide the best opportunities over the next decade for consumer sector companies, and 39 that offer secondary opportunities.
It believes the idea that companies should move into Tier 3 and Tier 4 cities is “misleading”, as is the view that companies need to be represented everywhere to compete.
“A successful growth strategy will need to be much more selective,” says the report.
