March 20, 2014

More challenges for China ahead

Education and economic liberalisation are changing China’s economy for the better, according to the ICAEW’s latest report Economic Insight: Greater China. Although the country’s transformation to a consumption-driven economy will be bumpy in places, with world-leading students, a commitment to reform and a growing services sector, there are reasons to remain optimistic.

 

The report notes that, despite the recent depreciation in renminbi against the dollar, the currency’s trend appreciation upwards against the dollar is likely to resume over the next few years. Although the strengthening of the US economy is likely to reduce the pace of appreciation slightly, over the long run the Chinese currency remains an attractive proposition.

 

This appreciation, however, raises challenges for the Chinese manufacturing sector as its output becomes less price competitive on international markets. Combined with rising average wages, partly driven by a fall in the working-age population, appreciation means the Chinese manufacturing sector will have to evolve to survive. Productivity increases will become essential if China is to remain an international manufacturing powerhouse. The report highlights a clear solution; a well-educated workforce. Chinese students are already among the best in the world, focused on working hard to achieve results.

 

According to the OECD’s most recent Student Assessment (PISA), Shanghai’s school-age students outperform counterparts in South East Asia, Europe and the US. ICAEW believes education should help China move up the value chain; a five-fold interest in registered trademarks in the five years to 2011 demonstrates there is already a new tendency towards entrepreneurship, and an increasing shift from being the country of manufacture to the country of design. The report also shows that as manufacturing declines, the services sector is rising.

 

The increase in average earnings across China has already helped to drive consumption, with retail sales up 13% in 2013. Along with financial sector liberalisation, this growth in wages should help to shift the economy towards a more sustainable, consumption-led trajectory. Economic liberalisation means market interest rates are beginning to rise and have increasing influence on the economy. Over time, greater returns should diminish the need for Chinese consumers to hoard wealth for their old age, boosting consumption further.

 

Douglas McWilliams, Chief Economist and Executive Chairman of Cebr, said: “What we are seeing in China is the growing pains of a developing economy. A traditionally weak renminbi has helped manufacturing and exports. Over coming years we will see this change. Bond yields have jumped, and the renminbi will resume its appreciation. Over the next few years this appreciation and rising wages may hinder growth slightly, but in the longer term it should provide a new impetus for economic expansion as China changes gear to specialise in high-value manufacturing and services..”

 

James Lee, Regional Director, ICAEW Greater China, said: “China is changing. Over the last year, bold reforms have set the stage for China’s economic transformation, but the way is now open for the younger generation to play the starring role. China’s students lead the world in hard work and acquiring skills, which will be vital to making the jump from a ‘producer’ economy to a ‘designer’ one. What is needed now is for those young people to ensure they have the skills necessary to thrive in business in the 21st century.”

 

Other findings of the report include:

 

  • Government stimulus allowed China to maintain GDP growth at 7.7% in 2013. However, the pace of expansion is likely to gradually decelerate, as the economy rebalances away from manufacturing and export, to around 7.3% this year.

 

  • Gambling revenues in Macau surged by a fifth and growth is expected to accelerate still further due to investment and the opening of the Hong Kong-Zhuhai-Macau bridge in 2016.

 

  • GDP growth in Hong Kong was held back by economic contraction in the eurozone and weakness in other Asian economies. However, it is expected to pick up the pace to 3.8% in 2014.

 

For further details and a copy of the report, please visit ICAEW’s website.

 

 

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