Prospects for the Chinese economy EU Trade Commissioners Shanghai December 16, 2008 Mary Boyd

1. Prospects for the Chinese economy EU Trade Commissioners Shanghai December 16, 2008 Mary Boyd Director, Shanghai Corporate Network Economist Intelligence Unit maryboyd@economist.com

2. US: 2009 slower than 2008 Contributions to US qoq growth; percentage points. GDP growth is % change qoq, annualised.

3. China: reality starts to bite • Slower exports • Credit squeeze • Labour issues • Inflation worries • so… • Easing the brakes • Buying one’s way out of trouble

4. China: 2008/9—lower growth, high risks • GDP growth of 9.8% in 2008 (11.9% in 2007) • 7.5% in 2009 • Spillover effect from global recession • Global credit contraction, China’s credit quota • Inflation = 6.4% yearly forecast • Fiscal burden • Natural disasters

5. reduce investment in overheated sectors stimulate domestic consumption levels use fiscal transfers, fixed asset investments to redress balance between rich and poor areas (policy) …while managing economic transition and maintaining stability Olympic year Industrial upgrade Global downgrade Cooling measures: stable macroeconomic deceleration was Beijing’s goal - but it is now going for growth

6. Exports sputter, and there’s worse to come China’s H1 exports by destination 20.6% 17.5% 8.3% 13.6% 8.3%

7. Major headaches • Collapsing stock market • Knock-on effect of world financial turmoil • Will consumer spending hold up?

8. slower US growth will have selective impact on China rate of RMB appreciation has picked up, to 9.7% in 2008. ¥6.42:US$1 by end-2010 but still no one-off move China ¥ = US $

9. Power shortages • Masses of new generating capacity • Pricing policies a major factor in shortages • 2002 = 824 kg. oil per head • 2008 = 1,405 kg. oil per head • 2002 = 1,271 kwh per head • 2008 = 2,471 kwh per head

10. Pro-union push by ACFTU Embryonic “collective bargaining” More litigious work force Demographic pressures Importing of cheaper labour Wage pressures

11. New inspection protocols, confidence-building measures Major trading partners enlisted for new (harmonized) standards EHS outlook: old problems, new protocols

12. Land tenure issues, rural livelihoods Food safety concerns Food security concerns The agribusiness approach

13. Fallout in local property markets, transactions and prices are down Consolidation in property sector Local municipalities try to keep their markets afloat Relief for mortgage holders? Real estate market factors

14. A housing bubble?

15. Labour unrest • Taxi strikes • Skills shortages • Paying the price of industrial upgrades • Moving back home

16. No more fast lane

17. Government to the rescue • Export rebate tax adjustments • Credit relaxed for SMEs • Stimulus package • …But watch the 3 Rs: • Regulations, Raw materials, Renminbi

18. The stimulus package?

19. The rise of the welfare state should underpin greater consumption • The 17th CCP Congress: “Harmonious society” policies take effect • Education • Health • Poverty stipends • Subsidized housing • Rapid growth of 2nd and 3rd tier cities and beyond • But saving culture unlikely to be lost overnight

20. Asset bubble had fed conspicuous consumption Will buying habits persist in hard times? Global reliance on Chinese consumers

21. Empty lots

22. On-line consumption

23. Consumer resilience?

24. Asset shifting

25. “万村千乡市场工程” rural retail policy push Revolution in rural finance Hypermarkets, supermarkets, mini markets, convenience stores, gas stations expand the rural footprint Rural markets on the move

26. Thank you! 谢谢 Mary Boyd Director, Shanghai Corporate Network Economist Intelligence Unit maryboyd@economist.com