Bold policy decisions could lead to a new era of economic expansion for China, according to the latest report from ICAEW. After three decades of break-neck growth the economy is slowing down, even though China’s share of global trade continues to grow. A shift away from investment-led growth and towards consumption could allow the country to realise its enormous potential for development.

 

The quarterly report, Economic Insight: Greater China, is produced by Cebr (The Centre for Economics and Business Research), ICAEW’s partner and forecaster. Commissioned by ICAEW, it provides a current snapshot of the region’s economic performance for ICAEW members and other stakeholders.

 

This year China overtook the United States as the economy with the largest share of global trade, involved in 11% of all global merchandise.  It is also the world’s largest consumer of energy with crude oil imports expected to hit 300m tonnes this year. New government emphasis on developing innovation should further open opportunities for an increase in exports as reliance on foreign designs is reduced. However, the report warns that investment is still likely to account for over half this year’s economic growth, and policy will need to be redesigned if the economy is to move to a consumption-driven model.

 

James Lee, ICAEW Regional Director, Greater China, said: “Even though we have seen reports that China will cut its growth target to 7% next year, its importance as a global economy is only continuing to grow. Levels of both imports and exports are rising and China’s economy is one of the most influential in the world. However, much of the growth is still being driven by investment. Bold steps are needed to steer the country through a period of change, but if these opportunities are grasped China could be on the edge of a new era of economic expansion.”

 

The report also looks at the growing use of the renminbi as a trading currency, with the volume of trade settled in Yuan rising sixteen-fold in the last three years, entering the top 10 globally-traded currencies. At the same time, Overseas Direct Investment (ODI) is growing exponentially, and with it China’s economic influence overseas, as companies invest beyond energy and resources. However, even though renminbi is now used to settle almost a fifth of all China’s trade deals – unthinkable four years ago – there is still some way to go before the renminbi becomes a major global reserve currency.

 

ICAEW Economic Advisor and Cebr’s Chief Executive, Douglas McWilliams, said: “There is little doubt China’s importance to the global economy will only continue to grow over coming decades. However we are starting to see a shift in emphasis. A good example is in the type of overseas direct investment we are now seeing; the first wave of Chinese ODI was mostly State-owned enterprises investing in energy and natural resources. Now we are seeing private firms investing in brands, technology and skills. This suggests a step up the ladder of production from manufacturing to design, increasing the value added of Chinese firms.”

 

However, Douglas warned that in order to shift towards consumption rather than investment-led growth, wider scale changes would be needed: “China certainly looks committed to moving policy in the right direction, most recently shown by the opening of the Shanghai (Pilot) Free Trade Zone, but there are a number of changes that would need to be made – including liberalising interest rates and financial systems and reforming state-owned enterprises.”

 

The global importance of the Yuan continues to grow. Over the last three years, the proportion of Chinese trade settled in renminbi has grown from 1% in 2010 to 16.6% this year. Trade between the US dollar and the renminbi has tripled over the same period.

 

Douglas said: “Trade in the renminbi has boomed. It may be a long way from becoming a major reserve currency like the dollar, but it is rising rapidly, and as more trade is conducted in yuan, monetary authorities will be increasingly keen to hold it. However, the main barrier to broader international use remains the lack of full, official convertibility.”

 

For further information and a copy of the report, see ICAEW’s website.