China can sustain 7% GDP growth for 12 years if the tier 2 and tier 3 cities catch up the tier 1


Business Week – This week, both China bears and China bulls can point to numbers that seem to prove their cases. For those downbeat about China’s chances, the grim export figures for November are the latest piece of evidence. Export growth fell to just 2.9 percent year-on-year last month, down from 11.6 percent in October. The November results were much lower than what many economists had expected: Barclays, for instance, had thought the number would come in at 11 percent; Daiwa was expecting 9.2 percent.

Even with the poor export picture, though, the Daiwa economists expect China’s economy to rebound in the fourth quarter of 2012. They point to a 10.1 percent increase in industrial production last month, an improvement over 9.6 percent growth in October. “This suggests to us that real [gross domestic product] growth should have rebounded strongly in 4Q12,” Sun and Sun write.

Other good signs include lower inflation for the non-food consumer price index, which fell to 1.6 percent in November from 1.7 percent the previous month. Daiwa expects Chinese GDP, which grew at 7.4 percent in the third quarter and 7.6 percent in the second, to bounce back above the 8 percent threshold this quarter, with growth coming in at 8.2 percent.

The growth isn’t coming from the export sector. And it’s not coming from domestic consumption either, according to Bloomberg economist Michael McDonough. Rather, China is rebounding largely thanks to state spending on infrastructure projects.

Guangdong province in southern China plans on spending more than 1 trillion yuan on rail and other transportation projects between 2011 and 2015, the government announced on Nov. 16. That’s more than double what the province spent in the five years ending in 2010.

2. Standard Chartered’s economist Stephen Green suggests makes the case for China growing GDP annually at 7% or more for five years to 12 years.

China should be able to grow at 7% for five years, possibly longer, by developing its own backyard

Services, the next growth driver, account for only 37% of GDP in Tier 3 provinces (61% in Tier 1)

63% of China’s population live in Tier 3 provinces

Green argues that just for China’s poorest provinces to catch up with their wealthier counterparts would produce 7 per cent GDP growth rate – along with the ongoing process of rapid urbanisation.

Shanghai Daily – if the poor parts of China were able to catch up with the rich parts of China – in other words, if the poor parts could just follow the same growth model and do what their neighbors have done – then 7 percent potential growth for another 5 to 12 years looks achievable to us.

We group the provinces into three tiers according to gross domestic product per capita:

Tier 1 municipalities, Beijing, Tianjin and Shanghai and their rural outskirts, are home to 4 percent of China’s population, produce 9 percent of the country’s GDP, and had average per-capita GDP of 78,800 yuan (US$12,500) in 2011.

Tier 2 provinces, with average per-capita GDP of 50,000 yuan in 2011, include seven provinces, Fujian, Shandong, Liaoning, Guangdong, Inner Mongolia, Zhejiang and Jiangsu. One-third of the country’s population officially live here.

The rest provinces are left in Tier 3. This group had average per-capita GDP of a third of the Tier 1 level. Altogether, Tier 3 provinces contribute about 46 percent of China’s GDP, while they are home to 63 percent of the population.

Now, what would happen if Tier 3 and Tier 2 provinces caught up with today’s Tier 1 level of per-capita GDP?

If Tier 3 provinces could reach the current per-capita GDP level of today’s Tier 2 provinces, China’s whole economy could grow at 7 percent for another five years.

If Tier 2 and Tier 3 provinces could increase their per-capita GDP to today’s Tier 1 level, the national economy could grow at 7 percent for another 12 years.

At least two substantial arguments could be mustered against us:

First, sceptics might point out that that it is much harder for poorer inland provinces to grow than coastal zones. In response, we argue that inland infrastructure has clearly improved, attracting manufacturing investment; and a number of these places have natural resources to exploit.

Second, the rich provinces might have left behind a grenade that will blow up the bridge to riches. Such problems might include ballooning government debt, a housing-market bubble, or a decline in productivity associated with an overly regulated services sector. These are clearly issues, some of which we have dealt with elsewhere. In short, we believe that policy makers can muddle though.

Indeed, the catch-up by poorer areas has already begun. Levels of Tier 3 and Tier 2 per-capita GDP relative to Tier 1 levels have been rising since 2004. Moreover, except in 2008 to 09, the catch-up process has not lost momentum.

All else being equal, we see no serious barriers to people in poorer provinces moving into urban areas, becoming more productive, being paid more, becoming consumers and generating a larger services sector in their areas.

This is not rocket science, and it does not require a massive change in the growth model – all we look for is for China’s Tier 3 regions to do what Tier 1 and 2 regions have done before.

Of such things a few more years of growth are made.

China Daily – “We work out how much growth would be generated if the poor parts of China caught up with today’s rich parts. Simple mathematics suggests that a sustained 7 percent rate of growth for at least five more years is a reasonable expectation,” said Stephen Green, an economist with Standard Chartered.

And we see no serious barriers to people in poorer provinces moving into urban areas, becoming more productive, being paid more, becoming consumers and generating a larger services sector in their areas, Green added.

Services, the next growth driver, account for only 37 percent of GDP in third-tier cities, compared with 61 percent in first-tier cities. Sixty-three percent of China’s population live in third-tier cities

Green argues that if China’s poorest province Guizhou moved up the income ladder to Tier 2 status with an average annual per capita income of $7,900, almost double that of Tier 3 provinces in the country, that upward mobility would propel the country’s GDP growth rate by 7% or more.

There is plenty of catch-up growth to go around in the populous nation. Tier 3 provinces in China make up 46 per cent of the country’s GDP while accounting for almost two-thirds of China’s population. There is also plenty more urbanisation down the road for China’s Tier 3 provinces.

3. China Daily – According to the Boston Consulting Group, China’s wages, if priced in the US dollar,are expected to rise 15 percent to 20 percent year-on-year, faster than the growth of its productivity. The gap between labor costs in China’s coastal regions and some of the states in the US will narrow in the years ahead. China’s advantages will further narrow if the US’ lower energy costs as a result of its exploitation of shale gas are taken into account

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