China experts highlight need for economy based on consumption, innovation

DALIAN, CHINA – Can the Chinese economy continue to thrive? This was the question that dominated discussions among leading Chinese and foreign business executives who gathered at a World Economic Forum meeting in the northeastern city of Dalian last week.

Many at the Annual Meeting of the New Champions 2015, dubbed “Summer Davos,” appear to be cautiously optimistic, at least with regard to China’s economy in the short term, while also acknowledging political uncertainties and challenges that the world’s No. 2 economy will have to face in the coming months.

Since the Chinese central bank changed its exchange rate formation mechanism on Aug. 11, the yuan has dipped more than 4 percent against the dollar, and Chinese stocks plunged about 30 percent in late August, sending a ripple effect through global markets.

“It’s true that the Chinese economy had come under a number of difficulties and downward pressure,” Chinese Premier Li Keqiang said in his speech delivered Thursday at the WEF meeting attended by some 1,700 leading business, political and academic figures from around the world. But the economy remains in the “proper range,” and “if there are signs that the economy is sliding out of the proper range, we have the ability to deal with the situation,” he said.

While stressing that China’s transition to a consumption- and innovation-driven growth model may produce some growing pains, Li pointed out China’s 30 percent share of global growth in the first half of the year, saying its economy will continue to grow at the government-set target of around 7 percent this year.

Despite Li’s optimistic forecast, some at the meeting predicted a much slower pace of economic growth.

Others noted that viewing China through the lens of the Western market economy was wrong, as the Chinese economic structure differs significantly from that of many industrialized countries.

Jeff Walters, a China-based partner and managing director of Boston Consulting Group, agreed.

“It’s only around 20 percent of households that actually invest in the stock market, and a lot of companies don’t use the equity market for financing,” Walters told The Japan Times, explaining that many Chinese companies finance themselves through state-backed bank loans.

“It’s true that there are some challenges in the economy, but the market correction isn’t going to have a huge effect on the economy,” he added.

One of the economy’s driving forces, the longtime China expert said, is the country’s strong consumption, backed by what he described as the “upper middle class.” The service industry in China is expanding rapidly due to this growing group of affluent people, he said.

Walters, whose clients are mainly consumer goods retailers, has conducted a variety of research on Chinese consumers. In the past decade, he said, many households entered the “emerging middle class,” meaning they earn enough money to buy branded consumer goods. But now, that emerging middle class is shrinking as people are getting richer and joining the “upper middle class,” he said.

“Instead of 5,000 renminbi (about ¥94,000) a month, they earn 12,000 RMB (about ¥227,000) a month. That segment is really growing quickly. When we do consumer research, they are happier, more likely to spend more and very positive. These are the people that are traveling overseas,” he said, adding that Japan should not worry too much about losing Chinese tourists.

Retail sales in China rose 10.8 percent in August from the same period last year, while industrial production posted a year-on-year growth of 6.1 percent in August, according to data released Sunday by the National Bureau of Statistics.

“Your view of China depends on what industry you are in,” said Walters. “If I were a construction company, I would expect market growth lower than GDP growth. If I were a company that is very effective at selling products to the upper middle class in China, that pool of people is growing, and I have a market that is growing much faster than GDP.”

Hiroo Mori, executive vice president of Mori Building Co., a Japanese real estate company that operates the Senmao Building in Dalian, the HSBC Tower and the Shanghai World Financial Center in Shanghai, said that although some areas may see a slump, large Chinese cities will continue to grow thanks to China’s expanding service sector.

“The occupancy rate of our office buildings in Shanghai has been 95 percent to 100 percent for the past several years, and it has not changed even now,” said Mori, who also attended the Dalian conference.

Sales figures of Mori Building’s commercial complexes in Shanghai have constantly showed year-on-year growth of 5 to 10 percent every month, he added.

Whether the Chinese economy can successfully transform itself, however, remains to be seen.

“The equity market has a very limited impact on the real economy,” said Min Zhu, deputy managing director of the International Monetary Fund. He stressed the need for China to continue pursuing reform aimed at transforming its economic growth model from one focused on capital investment and manufacturing for export to one driven more by consumption and innovation.

The IMF forecasts that China’s GDP will grow 6.3 percent next year.

Some are also voicing concerns over the feasibility of Chinese government reforms, pointing out the lack of transparency and concrete details of their implementation.

The lack of transparency in dealing with the massive chemical explosion in Tianjin last month has also raised questions about the government’s management abilities.

Speaking about the recent devaluation of the yuan, Heizo Takenaka, a professor of policy management at Keio University who served in several top economy-related government posts, also questioned China’s intention to become a global market player during the conference.

“As a political decision, it is understandable. . . . But people now are expecting much more of a free-market system (for determining the yuan exchange rate),” he said, expressing hope that the Chinese central bank would become more independent.

Meanwhile, Victor Chu, chairman and CEO of First Eastern Investment Group in Hong Kong, expressed concerns about the current political situation in China.

“In the near term, I am more concerned about politics,” he said, pointing to President Xi Jinping’s ongoing anti-corruption campaign, which has stymied decision-making and policy implementation processes by middle-ranking bureaucrats in local governments.

“There is a lot of anxiety among the middle-ranking bureaucrats as to whether their boss will be replaced or whether they will be affected. . . . They are afraid and they are not making the bold reforms they should be,” Chu said. “Their decision-making time is longer. They are not coming up with policy as clearly, or as quickly, as they used to. If it continues for another 12 months to 24 months, China will be hurt.”

Chu welcomed the strong leadership of Xi and acknowledged the need for such a strong leader to push through reforms. But he also warned that a strongman can lead a country into disaster if he makes a wrong decision.

“So far, he’s been very much on target,” Chu said. “So, I am concerned, but I think there is hope.”

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