major reforms set china on path to an advanced economy

Major reforms set China on path to an
advanced economy
Welcome to ICAEW’s Economic Insight: Greater
China, a quarterly forecast for the region prepared
specifically for the finance profession. Produced by
Cebr, ICAEW’s partner and acknowledged experts
in global economic forecasting, it provides a unique
perspective on the prospects for China over the
coming years. In addition to mainland China,
we focus on the Hong Kong and Macau Special
Administrative Regions (SARs).
Chinese economic prospects continue to look fairly
solid, with growth expected to gently slow in the
coming years but also become more sustainable.
However, considerable uncertainty has spread across
the global economic stage in the last few months
as geopolitical crises in the Middle East and Ukraine
have become more acute. The eurozone also took a
step back from its tepid recovery as it stagnated in
Q2 2014. This was driven by poor performance in
the bloc’s three largest economies, Germany, France,
and Italy, raising fears over a slip back into recession.
All this uncertainty poses notable risks to external
demand for Chinese goods and services, and also to
Hong Kong, where the economy depends heavily on
the performance of the global financial sector and is
very sensitive to uncertainty.
Economic Insight:
Greater China
Quarterly briefing Q4 2014
BUSINESS WITH confidence
Within China, 2014 has proven to be a year of hectic
policymaking so far. In March, the government
unleashed a fiscal stimulus package to prop up
economic growth in response to weak economic
performance in the beginning of the year, caused
by diminishing returns to investment and increasing
concern over debt levels. Significant reforms have
been implemented at a regional level, especially
in the residential real estate sector, which was
judged to be in danger of overheating but has now
started to cool down. The hukou system, which
governs population movements between rural and
urban areas, was also one of the important policies
subject to reform this year. Regional development
and the support of industrial clusters has slowly
also emerged as a policy focus, in an effort by
the government to revive regions that have been
lagging behind economically.
In this issue of Economic Insight: Greater China, we
examine the changing economic geography of
China. We look into the key drivers behind domestic
migration and urbanisation trends in the mainland.
We explore the rise of Chinese megacities and the
implications of major policy developments like
the reform of the hukou system. We also look at
how regional development has been shaped by
clustering of particular industries and the policies
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engineered to facilitate this further, for example the
Shanghai Free-Trade Zone and the recently-announced
plans to revitalise the north eastern economies through
substantial investment in railways. Finally, we present
our latest forecasts for the Chinese economy, based on
recent developments at home and overseas.
Mainland China is still predominantly rural,
but this is changing fast
Over the past three decades of economic liberalisation,
China’s economy has experienced an extraordinary
transformation. The development achieved through
industrialisation, investment and trade, has shaped
the economic and demographic landscape of the
different regions in uneven ways. From a predominantly
rural and relatively immobile society, China has now
transformed with over 10% of the population made up
of migrants1. The direction of migration has principally
flown from rural to urban areas: in 1950 China’s urban
population was 65m, just 11.8% of the total and under
a tenth of today’s 712m. By 2011 China had become
a predominantly urban society, with 50.6% of the
population registered as living in cities. As shown in
Figure 1 however, China’s urbanisation rate is still below
the global median of 58.4%. The picture is very different
in the Special Administrative Regions of Hong Kong and
Macau, which rank at the very top end of the scale with
almost 100% of the population residing in urban areas.
This inequality has been particularly clear between the
eastern and western regions of China, as well as between
rural and urban areas. As Figure 2 shows, urban-rural
income ratios grew rapidly in the years leading up to
the late 2000s, increasing from just above 2:1 in the
late 1990s to over 3:1 in 2006–2010. These differences
in turn gave birth to economic incentives for domestic
migration from China’s less prosperous rural farmlands
to the rapidly growing urban centres.
Figure 2 : China’s Urban-Rural Income Ratio,
1990–2012
Ratio
3.5
3.0
2.5
2.0
1.5
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: National Bureau of Statistics of China
Figure 1: Urbanisation rate2 by country in 20103
%
100
80
60
40
20
0
Asia China Eastern
Asia
Source: United Nations World Urbanisation Prospects
The patterns of migration observed in mainland China
over the past three decades have been shaped by a
combination of economic, demographic and policy
changes that have occurred since the end of the Maoist
period. Following the adoption of free-market reforms
in the late 1970s, China’s economy has seen rapid
expansion, at an average annual pace of around 10%.
During this period, growth was heavily driven by the
manufacturing and exporting sectors. As such, the
benefits were heavily biased towards the urban regions
that hosted these sectors, particularly those located in
China’s eastern, coastal provinces.
A further driver of the rural-to-urban migration flows
has been demographics. High fertility levels in the 1950s
followed by a rapid drop in the 1970s led to a high
number of young adults in the Chinese population of the
1980s and 1990s. Economic theory and evidence shows
the young are more likely to migrate, as they are less
likely to have settled and developed roots in a particular
location compared to older demographics.
Finally, population movements – and their restriction
– have also been policy-driven. Population movement
control in China has long been governed by the system
of hukou, or household registration. This divides the
population into holders of ‘urban’ and ‘rural’ hukous,
usually determined by birthplace and the equivalent
status of their parents. Ultimately, hukou determines
where residents are entitled to receive benefits. The
policy has made it more difficult for rural hukou holders
to survive in cities, because without an urban hukou
they did not have access to the centrally-managed
essential resources such as food and housing. Since the
1980s however the system has been gradually reformed,
allowing a relaxation of restrictions on population
movement. This has contributed to higher migration and
reinforced the trend of urbanisation. Box 1 provides a
more thorough picture of the hukou reform process.
The creation of Special Economic Zones (SEZs) in coastal
Guangdong and Fujian in 1979 further accentuated this
trend. This uneven pace of development among China’s
regions has led to a sharp increase in inequality. Between
1984 and 2012, China’s Gini coefficient – the widely
used measure of inequality where 0 is fully equal and 1 is
completely unequal – increased from 0.28 to 0.474.
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economic insight – Gre ater Chin a
Q 4 2 014
Box 1 Hukou reform
China’s hukou system was introduced in 1958 to control
migration between urban areas, whose citizens enjoyed
access to state-sponsored jobs, housing, food, and other
benefits, and rural areas, whose citizens enjoyed access to
farmland but no other benefits. Under this system, every
citizen is assigned either a rural or an urban classification,
usually inherited from one’s parents. This defines where
one belongs and where they are entitled to benefits.
At first, people were generally only permitted to work and
reside at their place of registration. This restriction was
eased in the 1980s, when rapid industrial development
accentuated the need for cheap labour for factories in
urban China. In 1985, the Ministry of Public Security
issued regulations for rural migrants to obtain ‘temporary
residence permits’, which made it easier for rural Chinese
to work in urban areas, and unleashed large waves of
migration.
Following this, city governments began charging migrants
fees for hukou as a compensation for the welfare benefits
and public services that this status conferred. The
commodification of the hukou was further entrenched
in the mid-1990s when large cities began to offer ‘blue
stamp’ hukou to migrants who met high skill criteria and
were able to afford them. These could, after a while, be
transformed into a permanent urban hukou.
In 1997, employed migrants who had been living in
selected cities for over two years were given an urban
hukou, this time without a hefty payment. These criteria
were relaxed further in 2001 to cover migrants with a
legal place of residence and a stable source of income.
Some provinces even decided to eliminate the hukou
distinction altogether. Others operate a system of
‘residence permits’, which entitle migrants to almost all
benefits bar their children’s access to university entry tests
in the city – instead, they have to take these exams in their
hometowns.
In March 2014 the government announced plans to phase
out the hukou and create a system of residence permits,
which will further accelerate urbanisation. This will
gradually entitle migrant workers to full access to public
services in the cities where they work. The proposed
reform has faced resistance from rural migrants who fear
losing their farmland, and from the urban populations
who fear loss of privileged access to public services.
Another potential obstacle to the implementation of
the reform is pecuniary, as its success hinges on heavy
government spending on public services.
Figure 3: Urban and rural population in mainland
China, millions
1,600
1,400
1,200
1,000
800
600
400
200
0
1950
1960
1970
1980
1990
2000
Urban population
2010
2020
2030
2040
2050
Rural population
Source: United Nations World Urbanisation Prospects
Shanghai more populous than the whole
of Australia
Breakneck urban expansion has not come without
unintended side effects however. Besides the rise of
inequality, overcrowding has also become a greater
challenge. As Figure 4 below shows, Beijing and Shanghai
are already greater in population than entire countries
or, in the case of Shanghai, entire continents. Hence, the
government has targeted urbanisation reforms at smaller
cities: the complete removal of the hukou as set out in the
new urbanisation plan applies to those cities with fewer
than 500,000 urban residents. Cities larger than this are
only allowed to gradually relax these restrictions, while
in megacities tough hukou conditions are expected to
remain in place.
Figure 4: Population, millions, Shanghai and Beijing
versus selected countries
Canada
Shanghai
Australia
Syria
Beijing
Romania
Kazakhstan
Netherlands
Tunisia
Portugal
By 2050, Chinese cities will be home to
over 1bn people
The planned further liberalisation of the hukou system
and the expected continued shift of the Chinese
economy’s centre of gravity towards its big cities and a
service-based economy, are expected to act as drivers in
widening the rural-urban divide further in the coming
decades. Premier Li Keqiang is a great proponent of
urbanisation, having referred to it as the ‘great engine’ for
expansion. As graphically projected in Figure 3, by 2050
Chinese cities will contain over 1bn people according to
the United Nations – this will be about 77% of China’s
population and over a tenth of humanity.
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0
5
10
15
20
25
30
35
Source: Chinese City Government statistics, World Bank, Cebr analysis
The overdevelopment and rapid growth in the population
of these megacities has created what has been termed
‘urban disease’. This phenomenon is rooted in the
imbalance between soaring population levels and scarce
urban resources. Brisk development of cities has led to the
destruction of older neighbourhoods, forcing inhabitants
to live in further-out gated communities, increasing
commuting times and traffic congestion. As a result,
pollution has reached alarming levels. Indeed, in 2013
only 3 out of 74 cities that adopted stricter air quality
standards hit their target. Political awareness of the issue
is growing in response, and Premier Li recently announced
that China would ‘declare war against pollution’5.
economic insight – Gre ater Chin a
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Box 2 The Shanghai Free-Trade Zone
(SFTZ) and its impact on the economy
of Hong Kong
The establishment of the Shanghai Free-Trade Zone (SFTZ)
was originally approved in August 2013 and launched a
month later. Within less than a year, the zone has now
attracted just under 10,500 companies, including around
1,250 foreign-funded companies. Its establishment
constitutes an important step for China to further open
its market, as it is the first such zone in the mainland. The
pilot reforms span three main areas: trade, investment,
and finance. Trade liberalisation has taken the form of
eased regulations for businesses in terms of imports,
re-exports, processing, and manufacturing goods, as well
as greater support for the shipping and general logistics
sectors to help Shanghai emerge as a free trade port. A
number of sectors have been opened up to investment,
such as banking, shipping, and legal services. Finally, in
the finance realm, the zone has been designed to provide
the testing ground for financial reforms such as interest
rate and exchange rate liberalisation, relaxed restrictions
on foreign currency, and freer renminbi convertibility.
The establishment of this SFTZ has sparked fears that
it may pose a competitive threat to Hong Kong, and
diminish the island’s longstanding role as the business
gateway to the mainland for international investors, and
as China’s prime offshore renminbi centre. While this
role has so far been largely uncontested, Hong Kong
has recently started to face challenges such as increased
political instability and higher labour and rental costs.
These developments could make it more vulnerable to
competition from China.
However, Hong Kong’s economic success rests on deep
specialisation in industries like finance, shipping, and
professional services. Even though these have been
opened up to investment as part of the reforms tested
out in the SFTZ, the institutional structure, know-how,
and human capital pool that is needed to allow these
industries to flourish could take a long time to take off
in the SFTZ. Hong Kong ranked seventh in the world
in the 2014 Global Competitiveness Index, prepared
by the World Economic Forum. Hong Kong ranks first
in the world when it comes to legal rights, financing
through local equity, hiring and firing practices, pay and
productivity, and the prevalence of trade barriers. Hong
Kong also ranked third in the world on the Z/YEN’s Global
Financial Centres Index for 2014, after New York and
London. All of these factors keep it in a great position to
stand up to competition, however strong.
While there has been substantial financial sector
liberalisation in the SFTZ, corporate tax rates were kept
at 25%, as in the rest of China. This compares to 15% in
Hong Kong, so it maintains a considerable advantage.
Finally, much of Hong Kong’s success is based on its
strong rule of law, stemming from the former colony’s
inheritance of a British-based legal framework. This again
will take time for Shanghai to develop and give Hong
Kong a comparative advantage.
In fact, the SFTZ could provide more opportunities for
Hong Kong. As shown in Figure 5, about 10% of all bank
deposits in Hong Kong are in yuan, and renminbi trading
volumes have overtaken the local dollar, according to
the Bank for International Settlements. This puts Hong
Kong businesses in a good position to use such deposits
to finance capital investment and merger and acquisition
transactions once the SFTZ starts moving towards capital
account liberalisation. As such, Hong Kong is poised to
become a net beneficiary of a more open China.
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Rise of Chinese metropolises has led to
massive construction boom
The extraordinary rise in population experienced by
Chinese cities has come hand in hand with their spatial
expansion. No other metric could be a better indicator
for their spatial expansion and modernisation than the
number of new skyscrapers occupying skylines. Between
2000 and 2014, the construction of 255 skyscrapers was
completed in China, more than the total ever built in the
US and Europe combined, bringing China’s total count to
292. Out of these, just 63 are located in Hong Kong and
3 in Macau.
In 2013 alone, China completed a total of 37 skyscrapers
– 50% of the global total completed in that year. These
were spread over 22 cities, with the tallest being the
322m Modern Media Centre in Changzhou. The total
summed height of China’s 200m+ buildings now amounts
to over 72km, compared to just under 27km for the US
and 30km for the Middle East.
Figure 5: Total number of skyscrapers6, by region and
period of completion
300
250
200
150
100
50
0
China
Asia ex.
China
United
States
Post-2000
Middle
East
Rest
Europe
Pre-2000
Source: The Skyscraper Center, Council on Tall Buildings and Urban Habitat
Looking ahead, China’s skyscraper boom seems on track
to continue. Shanghai is close to completing the 121-floor,
632m tall Shanghai Tower, currently the second highest
building in the world surpassed only by Dubai’s Burj
Khalifa. Suzhou earlier this year announced plans to build
the 700m Zhongnan Center which, once completed,
will be the tallest building in China and third tallest in
the world. Overall, 78 new skyscraper completions are
expected in 2015, 55 in 2016, and 39 between 2017 and
2020, according to data on buildings under construction
from the Skyscraper Center.
Government launches reforms and pilot
programmes to revitalise lagging regions
While some cities and provinces have enjoyed rapid
economic expansion, others have lagged behind.
The north eastern provinces of Liaoning, Jilin, and
Heilongjiang were once described as China’s ‘rustbelt’,
providing much of the raw materials and machinery
products needed for China’s manufacturing-based,
export-led economic expansion. Lately, and linked
to the slowdown seen in China’s economy this year,
these provinces have performed less impressively. This
was chiefly due to the strong presence of state-owned
enterprises (SOEs) in these regions that take longer to
respond to the market. In response, the government
announced a number of measures in August such as
opening SOEs to private investment and encouraging
private investment in infrastructure projects through
public-private partnership (PPP) deals. Many of these
economic insight – Gre ater Chin a
Q 4 2 014
are aimed at upgrading the region’s extensive but worn
railway system, as well as the construction and expansion
of 10 regional airports, ultimately helping encourage
more trade.
Railway investment has recently become an important
priority across wider China as well. In April 2014, the
State Council formed a fund open for private investment,
expected to reach RMB 300bn, on top of the state
funding pool of RMB 800bn. This places the China
Railway Corp (CRC) in a good position to complete
the planned additions of 64 new rail projects. Some of
these will be aimed at further facilitating urbanisation by
connecting the country internally, while three planned
cross-border connective railways along the Silk Road
economic belt will better connect the mainland with
the economies of Mongolia, Uzbekistan, Kyrgyzstan and
Pakistan. This is expected to lead to an improvement in
regional trade and turn China’s western provinces into
international trade hubs. In addition, this will allow China
to benefit from lower labour costs in these countries;
an increasingly important objective so that its labourintensive industries can maintain their competitive edge
amid rising domestic wage rates.
Expansion of trade links is also taking place in China’s
southern borders: a proposed economic corridor between
China and Singapore has recently received increased
political attention at both the local and national level, in
China and abroad. This project involves the promotion
of the China-ASEAN Free Trade Area (FTA) and Maritime
Silk Road, linking China with Vietnam, Laos, Cambodia,
Thailand, Malaysia and Singapore, through the improvement
of transport and logistics infrastructure such as highways,
railways and airlines. Thailand’s military junta has already
approved an infrastructure budget plan that includes
the building of a high-speed route linking it to China. If
successful, the China-ASEAN FTA project could lift trade
volumes between China and ASEAN from US$ 444bn7
to US$ 500bn in 2015 and US$ 1 trillion in 2020.
The government has also launched a number of pilot
projects to support the development of specific hubs.
Hengqin Island, across the Pearl River from Shenzhen, is
being developed as a test bed for encouraging domestic
consumption. It has been designed as a hub for creative
industries and tourism, with theme parks, hotels and
restaurants. The Shanghai Free-Trade Zone (SFTZ) is also
promoted as a testing ground for a number of reforms in
trade, investment, and finance. Box 2 provides detailed
information on the SFTZ and its impact on Hong Kong.
Figure 6: Customer deposits in Hong Kong in yuan
(millions of yuan – LHS), and yuan share of total
deposits (RHS)
1,000
Increased global uncertainty takes a toll
on Hong Kong
Economic prospects look fairly solid in 2014 for mainland
China, which is expected to meet (but not exceed) the
government-set target of 7.5% annual GDP growth
this year. This will be a slowdown from last year’s 7.7%,
owing to a combination of domestic and international
factors. Domestically, diminishing returns to investment
and a cooling housing market have acted as drags on
growth, offsetting the positive effect from governmentinduced fiscal stimulus. Considerable uncertainty on the
international political stage with crises in the Middle East
and Ukraine, have also provided a negative backdrop for
China’s heavily outward-looking economy, as has the
weak performance of the eurozone economy and a mixed
record in the US. Looking ahead, the Chinese economy
is expected to continue slowing gently over the coming
three years as the economy continues its journey from
middle-income to advanced economy.
Efforts in mainland China to crack down on extravagant
spending by officials is harming Macau’s leisure and
tourism-based economy, which shrank by 5.3% and 3.4%
over the first and second quarters of this year (quarter on
quarter). Tighter visa restrictions from mainland visitors
are expected to have a long-term impact on the island
economy. Consequently, economic growth is forecast
to slow down to 8.8% this year from last year’s 11.9%.
Growth is expected to slow further to 8.1% in 2015 as
the island faces competition from the mainland’s newlylaunched Hengqin island hub, but pick up pace again to
reach 8.6 % in 2016 with the opening of the Hong KongZhuhai-Macau bridge.
A weaker outlook than previously expected in the world’s
advanced economies such as the US and the eurozone
have led to a downward revision for the growth forecast
of Hong Kong’s heavily outward-looking economy for
2014, to 2.2% from 3.8% previously forecasted. Further
along the line the Hong Kong economy is expected to
pick up pace as the recoveries in the advanced world
gain a stronger foothold, and the pace of expansion is
expected to remain fairly solid at below but close to 2.5%
throughout the forecast period.
Figure 7: Greater China GDP growth forecasts
%
10
8
6
10
800
8
600
6
400
4
200
2
4
2
0
Mainland China
2014
Hong Kong
2015
Macau
2016
Source: Cebr forecasts
0
Jan
2009
Jan
2010
Jan
2011
deposits in yuan
Jan
2012
Jan
2013
Jan
2014
0
yuan share of total
Source: Hong Kong Monetary Authority
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economic insight – Gre ater Chin a
Q 4 2 014
1 Cebr calculation based on National Bureau of Statistics data
2 This measures the share of the population that lives in urban areas
3 Latest available data, China’s rate in 2010 = 49.2%
4 CIA World Factbook
5 http://sinosphere.blogs.nytimes.com/2014/03/05/china-declares-war-against-pollution/
6 All buildings higher than 200m
7 Latest data for 2013
For enquiries or additional information, please contact:
Juni Ngai
T +852 2287 7277 / 6381 1687
E [email protected]
Cebr
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