Multinationals and Economists see Postive Signs on China’s Economy

Global brands from Nestle SA (NESN) to Porsche AG said the worst has passed for China’s economy as wage increases and consumption in cities in the country’s interior drive sustained growth. China is “still an amazing opportunity,” Roland Decorvet, Nestle’s Greater China chairman, said at the World Economic Forum in Dalian, China. Porsche AG’s China Chief Executive Officer Deesch Papke said the country is likely to surpass the U.S. next year as its largest market.

“China has stepped out of the bottom of this economic cycle,” said Ma Jun, chief China economist at Deutsche Bank in Hong Kong, who raised his 2014 growth forecast this week to 8.6 percent, the highest among estimates compiled by Bloomberg. “I believe the recovery will be sustained for one year or even more than one year.”

Nestle spent almost 3 billion yuan ($490 million) to open two factories in mainland China this year. The Vevey, Switzerland-based foodmaker opened its second coffee extraction plant and another food factory in the world’s most populous nation this July.

“You have 350 million people who will not grow their own food and who will come into the city,” Decorvet said yesterday on the forum’s sidelines. “They have to buy food.”

Alliance Boots GmbH, owner of the U.K.’s largest drugstore chain, said it will seek acquisitions in China and could have as many as 5,000 pharmacies in the Asian nation in two years if it succeeds in closing enough deals.

Alliance Boots has 29 stores through a joint venture in mainland China, the world’s fastest-growing major pharmaceutical market. Industry sales in the nation are forecast to rise as much as 18 percent a year to about $165 billion by 2016, according to consulting firm IMS Health Inc.

China’s Banks will not go bankrupt

The Economist Magazine has a bullish on Chinese Banks by Joe Zhang of Guangzhou Wansui Micro Credit Company

Lately there has been much talk among analysts and investors of crippling bad debts at Chinese banks. Although the banks keep reporting bad debts of only about 1% of their total loan balance, few people actually believe those figures. And I certainly don’t.

In recent months, various scary estimates of bad loans at Chinese banks have come up from independent observers. Let us assume they are right and that over 10% of all loans in the sector are indeed dead. Is that the end of the world? My answer is no.

First of all, the high-level of bad loans will not affect the banks’ normal operations. What’s happened has happened. Whether the banks report those bad debts faithfully or not is not that important. After all, it is merely an accounting matter. You may argue that it would shake confidence to the ground. But we have been here before, and depositors did not run for the hills. In fact, most Chinese people were not even interested in the news. They just did not care, despite media reports that the banks were technically bankrupt. From 2000 to 2002, the Chinese banks and the government made no secret of the fact that around one-third of the banking sector’s loans were dead. In response, the government created four Asset Management Companies (Cinda, Orient, Great Wall, and Huarong) to take over those bad loans.

Unlike in the United States and elsewhere, there is no deposit insurance system in China. But the public has full confidence in the safety of their deposits in even the smallest of banks and credit unions. In the late 1990s, Hainan Development Bank collapsed, but there was absolutely no panic, and the government arranged for ICBC to take it over. In the past three decades, we have seen the failure of a large number of other non-bank lenders, but depositors have suffered virtually no losses.

Bad loans and thin capital cushions are indeed a worry. But a much bigger threat to a bank’s survival is a weak economy and thus poor demand for loans, as has been the case in Japan in the past two decades.

Fortunately, the Chinese banks do not have that problem today. Despite diminishing returns on investment and much-dreaded industrial overcapacity, demand for loans remains strong in China. The ultimate safety of the banking industry rests on two factors: public confidence and the shape of the economy. If either of these two factors is off, no amount of equity cushion is sufficient. When both factors are sound, one can even have too much equity.

Ultimately, Chinese banks are very liquid today. As long as the economy is still growing, albeit at a much slower pace, the banks will continue to make more loans, and most loans will still bring back interest as well as principal, enabling the banks to keep lending.

China Reforming Economy

Reuters has an article by Gordon Brown who was Prime Minister of the United Kingdom from 2007 to 2010. He is currently the U.N. Special Envoy for Global Education.

On paper the November plenum of the 18th party committee is just the latest in a sequence of party events that celebrate China’s new leadership. Yet it is the culmination of a carefully planned process of deliberation on reforms.

The third plenum is focusing on policies to meet China’s next challenge — the shift to a high-productivity, high value-added, consumer-based economy — the aim is to double average incomes by 2020, to achieve 70 percent-plus urbanization by 2025 and to have the world’s largest supply of graduates. If it succeeds, China will quickly surpass America as the world’s largest economy. By 2025 it will probably move from middle-income status to high-income status and make around 1 billion of China’s 1.3 billion population “moderately prosperous” middle-income citizens on their way to realizing what President Xi Jinping has called the “Chinese dream.”

For 35 years, China’s export-led growth — almost 10 percent annually – has been spectacular, lifting 500 million Chinese out of poverty. But as the World Bank “China 2030” report acknowledged (in conjunction with China’s economic ministry), productivity per worker and income per head are still far below America’s, so the second wave of modernization must break China out of that feared potential “middle-income trap.” Typically, a country’s growth slows as soon as its income is among the top 30 percent in the world. This slowdown occurs because as a country’s income rises, it is no longer able to compete on low wages, and it is unable to compete on value-added because of low productivity. Indeed, the China 2030 report forecasts the loss of 80 million of China’s 130 million manufacturing jobs to lower-wage Asia and Africa.

Despite international worries — most recently about both off-balance-sheet debt and the impact of the withdrawal of the West’s quantitative easing — China’s leadership believes it can beat the odds. Many economists, like Ruchir Sharma, author of Breakout Nations, believe that within fifteen years China will make it to a $20,000 average per capita income by combining its current manufacturing dominance with its future role at the geographic center of a global supply chain.

With its urban population expected to expand by 300 million, and aspirations rising among the Chinese people, China knows it will have to move quickly to exploit the “Third Industrial Revolution” from 3D printing and digital design to nanotechnology, biotechnology and genetics, hence its one million research and development workers and its plans for 100 million more graduates. The new growth agenda will need that talent, but it will also need an obsessive focus on innovation, enterprise and social reform — the topics under discussion at the World Economic Forum. The requirements are:

* Liberalization of interest rates and the prices of producer goods and utilities;

* A fairer competitive environment for private enterprises;

* The opening up of the land ownership and household registration systems;

* Local government fiscal reforms and the end of an overreliance on highly volatile land sales through the creation of a solid local tax base; (Debts owed by all levels of administrations, government financing vehicles and other public entities are estimated at twice the annual gross domestic product.)

* The gradual internationalization of the yuan, most recently with free convertibility with the Australia dollar and the UK currency swap agreement;

But perhaps the most important barriers to long-term success are the disparities in wealth, now being addressed under the premier’s desire to “promote social equity.” This is a prompting for tax reform and plans for better health and welfare benefits.
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