Core Views
We expect real GDP growth to fall significantly to 8.1% in 2012, from 9.2% in 2011 as the investment boom comes to an end and the growth in global trade flows cool. While private consumption will be a long-term outperformer, it will not be strong enough to compensate for these headwinds. Underrepresented service sectors such as telecommunications and pharmaceuticals will continue their secular growth boom.
While inflation remains elevated and concerns of overheating continue to dominate policymaker’s thoughts, we expect concerns to shift towards economic growth in the months ahead as the impact of slowing money supply growth undermines economic activity and price pressures. Further stimulus measures, while unlikely, pose a significant risk to this view.
The days of high trade surpluses in China are behind us, and while we expect the surplus to remain strong over the coming quarters as investment spending slows, the surplus will be smaller than in the peak years and will decline over time in line with the falling domestic savings rate. Our medium-term outlook on the yuan is much less sanguine than consensus and we see stability versus the US dollar over the coming year.
China is unlikely to experience a Middle Eastern-style popular uprising over the next few years, unless the economy experiences a sharp and extended slowdown. However, we believe that protests will gather pace as the economy cools and there is threat that Beijing assumes more economic control in a bid to maintain its political relevance.
Major Forecast Changes
We have upgraded our 2011 real GDP growth forecast from 8.9% to 9.2% due to the strong Q211 growth figure, although maintain our 2012 call for a slowdown to 8.1%. We have nudged down our outlook for China’s long-term real GDP growth rate from 7.0% to 6.8% due to a strengthening belief that further economic reforms will be hard to come by. We have pushed back our call for a drop in inflation, raising our end-2011 consumer price inflation forecast to 4.8% from 2.8%, while maintaining our end-2012 forecast for a slowdown to 3.1%.
Key Risks To Outlook
The main risk to our economic outlook comes from another collapse in external demand as was seen in the height of the global financial crisis. This would seriously undermine growth in trade-dependent industries and potentially hasten any fall in the property market, leading to a hard landing. The major political risk comes from a rise in social unrest and a surge in public demonstrations against government corruption/inflation/housing affordability, which could be triggered by overseas events or a en economic slump. While we do not see the rule of the Communist Party of China (CPC) as being at risk, such events would still have a detrimental impact on the business environment and could see the CPC strengthen its grip on the economy to the detriment of growth.
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Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Socio-Economic Risks On The Rise
The structure of China’s growth model may be undermining social stability, and similarities with the ‘Arab Spring’ – a series of protests and demonstrations – have led to concerns of more widespread and organised protests against the government
Table: Political Overview 8
Long-Term Political Outlook 10
Major Challenges Over The Coming Decades
China faces myriad economic, social and environmental challenges over the coming decades that could seriously test the Communist Party of China’s ability to govern
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Growth Figure Revised Up, But Weak Outlook Remains
We have revised up our 2011 real GDP growth forecast following the release of higher-than-expected expansion of 97% in Q211
Table: ECONOMIC ACTIVITY 15
Monetary Policy 16
Concerns To Shift From Inflation To Growth
We have revised upwards our inflation forecasts for China on the back of the upside surprise in headline consumer price inflation in June to 64%
Table: MONETARY POLICY 16
Banking Sector 17
Banking Sector Instability Playbook
As the repayment capacity of loans extended to local government investment vehicles comes under threat, we continue to expect instability in China’s banking system
Table: EXCHANGE RATE 18
Investment Climate l 19
Outward Investment Boom Has A Long Way To Go
The Chinese government and state-run corporations have invested heavily in overseas markets in recent years, both in financial and fixed assets, and we expect this trend to continue
Investment Climate ll 21
Gambling Boom: A House Of Cards?
Despite the well-known positive long-term story of Macau’s gaming industry and economy, we believe the current growth boom is being driven overwhelmingly by the credit bubble in China
Chapter 3: 10-Year Forecast 25
The Chinese Economy To 2020 25
7% Is The New 10%
China’s economic growth in the coming decade will be much slower than in the last, as the savings rate declines, the economic liberalisation process slows, and population growth falls
Table: Long-Term Macroeconomic Forecasts 25
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
Table: BMI Business And Operation Risk Ratings 30
Table: BMI Legal Framework Rating 31
Infrastructure 32
Table: Labour Force Quality 33
Market Orientation 34
TABLE: ANNUAL FDI INFLOWS 34
Table: Trade And Investment Ratings 35
TABLE: TOP EXPORT DESTINATIONS 36
Operational Risk 37
Chapter 5: Key Sectors 39
Pharmaceuticals 39
China remains one of the world’s most attractive emerging pharmaceutical markets
Table: Generic Drug Sales Indicators 2007-2015 40
Table: OTC Medicine Sales Indicators 2007-2015 41
Table: Medical Devices Sales Indicators 2007-2015 41
Table: Prescription Drug Sales Indicators 2007-2015 42
Table: Patented Drug Market Indicators 2007-2015 43
Telecommunications 43
Table: Telecoms Sector – Internet – Historical Data & Forecasts 45
Table: Telecoms Sector – ARPU – Historical Data & Forecasts (CN Y) 46
Table: Telecoms Sector – Mobiles – Historical Data & Forecasts 46
Table: Telecoms Sector – Fixed Lines – Historical Data & Forecasts 46
Other Key Sectors 47
Table: Defence & Security Sector Key Indicators 47
Table: Autos Sector Key Indicators 47
Table: Food & Drink Sector Key Indicators 47
Table: Oil & Gas Sector Key Indicators 48
Table: Infrastructure Sector Key Indicators 48
Table: Freight Transport Sector Key Indicators 48
Chapter 6: BMI Global Assumptions 49
Global Outlook 49
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS 49
Table: EMERGING MARKETS AGGREGATE GROWTH 50
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST 51
Table: REAL GDP GROWTH CONSENSUS FORECASTS 5
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