Domestic Consumption is Key to China's Sustainable Economic Growth

The recent financial crisis may have served as a catalyst for China to shift attention to developing homegrown consumption - which we have long believed is key to its long-term sustainable economic growth.

Henry Zhang, CFA, 29.07.2009
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The recent financial crisis may have served as a catalyst for China to shift attention to developing homegrown consumption - which we have long believed is key to its long-term sustainable economic growth.

On my trip, I visited Harbin, a major northeastern city traditionally known for its agriculture and power equipment manufacturing, as well as its annual ice and snow sculpture festival. Harbin, like many other cities in China, has transformed itself completely since I last visited there some 15 years ago. Aside from new buildings and wider streets, heavy traffic congestion within the city has become the norm rather than the exception due to the widespread ownership of private vehicles. When I toured a large local underground mall during lunch hour, I was quite surprised to see a

considerable crowd of shoppers there even on a workday. Because the city's economy has little exposure to exports, the local consumer sentiment has been virtually unscathed by the recent financial crisis. In fact, the mall I visited has now become a hot spot, as many export-orientated apparel manufacturers from other regions are seeking to rent space and shift the focus of their businesses toward domestic customers.

Buoyant consumer demand is also evidenced by the strength of the property sector. According to a government survey, property sales in the first six months were up 53% from a year ago. On a separate report published on Monday, the government announced that in June new home prices in 36 medium and large-sized cities surged 6.3% from a year earlier. At one property development site in the northern seaport city of Dalian, I was amazed to see not only newly built ocean view villas selling for about US$2 million each, but also that they had been easily sold out before the project was completed.

On the flip side, some have started to worry about whether another asset bubble is forming, especially in light of the increasing number of investors and "fast money" beginning to rush back into both the property and stock markets. While the upward trend is expected to continue for some time, China's banking regulator has asked lenders to enforce tighter scrutiny on second home buyers and strictly follow the 40% down-payment rule on second homes in a bid to curb speculation in the property market.

The National Statistics Bureau recently reported that China's economy grew at a respectable 7.9% rate in the second quarter. Supported by its huge stimulus programs and strong consumer sentiment, China appears to be on track to revive its economic growth. However, not all industries have benefited equally in the recent recovery. Industries focused on domestic consumption continue to thrive, while businesses that rely on overseas demand remain frail. The recent financial crisis may have served as an important catalyst for both the government and the private sector to shift attention to developing homegrown consumption-which we have long believed is key to long-term sustainable economic growth in China.







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