The Hindu Business Line : `China's growth story may stay intact'

Ample liquidity and strong growth prospects imply that the short-term picture after this lull is extremely upbeat. This was the highlight of findings by Macquarie Research.

Mumbai , Nov. 22

Chinese economic tightening (to offset expansionary effects of explosive growth in the trade surplus) has been effective, but it may be drawing to a close; and the economy is poised for a re-acceleration in 2007, a phenomenon that will offset weakening growth outside China.

Ample liquidity and strong growth prospects imply that the short-term picture after this lull is extremely upbeat. This was the highlight of findings by Macquarie Research after a recent 5-day tour of China with 30 fund managers listening to over 35 presentations covering Chinese macro-economic outlook, environmental issues, power and metal sector.

Slowing Chinese growth has no doubt hit steel and metals demand growth. The concerns previously expressed about medium downside risks (banking system, over-investment, lack of profitability etc) seem to have receded, with economists seeing the economic structure as sound.

industrialisation

The main drivers of China's growth remain urbanisation and industrialisation, with strong consumer spending growth also being an increasing factor in driving growth forward into the medium term.

The Government seems intent on changing the structure of growth in important ways to create a `socially harmonious' growth pattern, with greater emphasis on reducing income equality and encouraging consumption at the expense of pure investment, the Macquarie report asserted.

Interestingly, this is widely interpreted as leading to a slower rate of energy, steel and metals demand growth. The Government is definitely aiming at reducing the energy intensiveness of growth, although the only real manifestation of this so far has been changes to tax rebates on energy-intensive exports and placing export taxes on certain commodities.

The main reasons for these tax changes include attempt to reduce trade surplus (in the past, fiscal policies aimed at export promotion); encourage value-added exports rather than raw material; (so taxes on semi-finished steel, not finished steel products); discourage exports of energy-intensive / environmentally damaging products; and discourage over-investment in certain sectors.

strong demand seen

Macquarie said while a slowdown in growth in the coming months could be expected, indications are of a prolonged period of strong demand, with China 's urbanisation, infrastructure development and rising incomes driving strong demand growth for at least the next five years.

A report estimated that an extra 120 million people would have moved to urban areas by 2010, with an additional 430 million by 2020. It is forecast that the number of urban dwellers would reach 658 million by 2010 and 970 million by 2020, by which year the Chinese urban population would account for 65-70 per cent of the total population. This forecast expansion has huge implication for the world commodity market.

The new urban living residential space will rise to 30 sq mt per person by 2020 from 15 sq mt in 2000. Chinese GDP is forecast to slow from 10.5 per cent in 2006 to 8.5-9.0 per cent in 2007.