household consumption to slowly emerge as a driver of china’s growth

Household consumption to slowly
emerge as a driver of China’s growth
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
also focus on the Hong Kong and Macau Special
Administrative Regions (SARs).
2014 is expected to be an important year in
China’s journey from a middle-income to an
advanced economy, with growth being increasingly
consumption; rather than investment-driven.
Of late, the economy has been held back by
diminishing returns on investment and growing
levels of debt, but has also enjoyed the boost of
government stimulus in the form of credit expansion
and channelled investment into infrastructure.
Looking ahead, the rebalancing away from
investment towards household consumption,
together with some unfavourable demographic
developments, will inevitably slow economic growth
over the coming years. This is however, expected
to occur in a gentle and manageable fashion given
the vast array of tools at Chinese policymakers’
disposal. Government policy decisions are expected
to be as important a driver of growth as economic
fundamentals given China’s command economy
nature.
Economic Insight:
Greater China
Quarterly briefing Q3 2014
BUSINESS WITH confidence
In this issue of Economic Insight: Greater China, we
examine the rebalancing of the Chinese economy
towards household consumption in more detail,
looking into the key drivers of China’s high rates of
household saving. We also investigate the choices
made by Chinese households in using these savings
– from investing in goods such as property and gold
to providing a first-class education for their children.
Finally, we present our latest forecasts for the
Chinese economy, based on recent developments at
home and overseas.
China’s high household saving rate:
a puzzle?
A pattern of high income growth is generally
expected to lead to a greater share of consumption
and lower savings. When incomes are rising rapidly,
households tend to save a lower share of their
earnings as they become less cautious, reflecting
expectations that incomes will continue to rise in
the future. One would expect this to be the case
in China, where disposable incomes have been
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following a strong upward trend (see Figure 1) and
interest rate caps have kept real (inflation-adjusted)
returns on deposits extremely low – even negative in
some years, something that in theory should further
reduce incentives to save.
Figure 1: Annual disposable income, urban
households only, CNY per capita
30,000
%
60
50
40
30
25,000
20
20,000
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
10,000
1995
0
1994
15,000
1993
10
1992
CNY per capita
Figure 2: Gross saving rates by sector
Households
Enterprises
5,000
Government
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
Source: National Bureau of Statistics (Flow of funds data), Cebr analysis
Source: National Bureau of Statistics of China
The reality is that, despite what logic might suggest,
China presents a paradox in the sense that low interest
rates and strong income growth have sat alongside a
rise in household savings. As Figure 2 shows, household
saving as a share of GDP has risen from 18% at the start
of the century to 25% in the latest data from 2011,
representing more than half of China’s total national
savings. In absolute terms, household savings have more
than quadrupled in the past decade. A likely explanation
for this trend is the less developed nature of China’s
welfare system compared with many other economies.
This encourages households to save towards a specific
money target to cover for their retirement, irrespective
of the economic rationality behind this decision.
So, how are these significant levels of saving used
by Chinese households? In the absence of profitable
opportunities in the domestic interest and bond
markets, many households have turned to other assets
to park their ever-rising disposable incomes. One visible
example of this is the rise of Wealth Management
Products (WMPs) as the bright-burning stars of China’s
financial sector. These products have acted as an
experiment for financial liberalisation as – in contrast to
traditional bank deposits – they enjoy liberalised lending
rates. Research by Standard Chartered1 estimates that
Assets Under Management (AUM) of WMPs – a proxy
for their size and importance – have been rising by
about 60% year on year since 2009, compared to 15%
for traditional bank deposits. They are currently valued
at 11tr yuan, still a very small share – 10% – of the total
deposit pool, but this share is rising rapidly.
The government itself has also been quick to tap into
households’ desire to invest their savings to accumulate
further wealth. Special high-yield bonds issued by the
Shanghai branch of the Industrial & Commercial bank of
China on 11 July 2014, were sold out within hours of the
bank’s opening.2
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China surpasses India to lead the world in
jewellery fabrication
As disposable incomes have risen over the past decade,
and with associated accumulated savings following a
strong uptrend as well, the newly emerging Chinese
middle class has been eager to protect and invest its
savings in order to accrue further wealth. However, as
touched on earlier, the availability of profitable assets
is constrained: returns on conventional investment
assets such as deposits and bonds are suppressed, and
the property market has also been the subject of close
supervision by local governments in an effort to control
soaring prices and avoid overheating in the market. All
this has put Chinese savers on the hunt for alternative
ways to invest their newfound wealth. Sometimes this
has taken the form of using modern developments such
as WMPs, but it has also driven Chinese savers to more
traditional means of accumulating wealth.
Gold, for example, has proved to be an attractive savings
safe haven: beyond its industrial and cosmetic uses,
gold also acts as a store of wealth and a hedge against
inflation. On top of a long Chinese cultural affinity
to the metal as a symbol of wealth, the commodity’s
remarkable price performance over the past decade
also helped raise its allure among Chinese savers. Gold
jewellery in particular enjoys a special appeal: according
to the World Gold Council3, it accounted for close to
60% of all private sector gold demand in China in 2013.
As demonstrated in Figure 3, from humble beginnings,
China has gained an increasingly important role in
the global gold market, with jewellery fabrication
accounting for 37% of the global total last year,
compared to around 8% a decade ago. In absolute
terms, Chinese jewellery fabrication has more than
quadrupled in size from 217 tonnes in 2004 to 872
tonnes in 2013. According to the World Gold Council,
over 85% of this fabrication is destined for the domestic
market.
economic insight – Gre ater Chin a
Q3 2 014
Figure 3: Chinese4 and Indian jewellery fabrication
(tonnes), and China’s share of world jewellery
fabrication
%
1,000
40
900
35
30
tonnes
700
25
600
500
20
400
15
share of world total
800
300
10
200
5
China
India
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
100
0
China, % of world
Source: Thomson Reuters GFMS
2013 was a year of strong demand in the gold market,
chiefly due to the acute fall in the gold price in April.
This led consumers and investors alike to rush to take
advantage of the weak price environment and accumulate
reserves of the precious metal. China was no exception
to the rule: jewellery fabrication surged by 46% over the
year, bringing fabrication to a new record high of 872
tonnes and helping it surpass India to become the world’s
largest gold jewellery fabricator. The Hong Kong jewellery
market also posted strong growth in 2013, with gold
jewellery consumption soaring by 57% over the year to
reach 53.7 tonnes.
China is also the world’s largest gold producer: mine
production in 2013 stood at 437 tonnes – nearly 15% of
the global total and up from just 217 tonnes a decade
ago. Despite the rising trend, supply remains below the
strong level of domestic demand, resulting in a rising
need for gold imports. In this context, discoveries of
gold veins in Chinese territory should be highly welcome
news, making China less dependent on imports. On
a global scale, the number of significant discoveries is
diminishing at an accelerating pace, according to a report
by SNL Metals & Mining5. In contrast, the opportunities
of discovery within China seem relatively plentiful, as
evidenced by a recent discovery of a large gold deposit
with at least 127 tonnes of proven reserves in west
Xinjiang.
Number of Chinese students in the UK has
trebled between 2005 and 2013
The Chinese government’s ‘One Child Policy’, introduced
in the 1970s, has resulted in a sharp decrease in the
population of 0-14 year-olds from around 350m in the
early 1990s to 247m in 20116. This has created a standard
family structure of four grandparents, two parents, and
one child. This means that a lot of the attention and
resources of the parents and grandparents directed onto
the child, creates huge pressure for him/her to succeed.
This cultural development, together with the observed
upward trend in disposable incomes, has meant that
middle-class parents in China have both the financial
capacity and willingness to invest in the quality of
their children’s education. This is partly reflected in
the increasing numbers of families that can now afford
and choose to send their children to schools and
universities abroad. The UK, with its high quality worldclass educational institutions, provides a very attractive
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destination for Chinese families with a desire to invest in
education.
The UK Independent Schools Council (ISC) reports in its
2014 census that there are currently around 24,000 nonBritish pupils in ISC schools whose parents live overseas.
Out of these, the region with the greatest number of
UK students is Hong Kong (4,700), followed by China
(4,400). Together, Hong Kong and China alone supplied
37.2% of all overseas pupils to ISC private schools, almost
as many as from the whole of Europe (38.0%).
The data are even more impressive when looking at
higher education. The number of student-related visas
(excluding student visitors7) issued in the UK stood at
210,000 in the academic year ending in September
2013. As shown in Figure 4, the country with the highest
number of visas was China, with 57,000 students coming
to study in the UK. This is sharply up from 19,000 in 2006.
Chinese students now represent 27% of all UK student
visa recipients, compared to under 10% in 2006. Visas to
students from Hong Kong have also risen by 66% from
5,000 in 2006 to just under 9,000 in 2013.
Figure 4: UK student visas, top 10 nationalities
57,336
China
17,271
India
13,674
US
Nigeria
11,122
Pakistan
10,984
Saudi Arabia
9,943
Hong Kong
8,845
Malaysia
8,033
Thailand
4,502
Russia
4,206
68,833
Other
10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
Source: UK Home Office
Looking ahead however, this trend is expected to start
to ease as China makes further progress with developing
its own universities. This projection mirrors what has
happened in India, where the number of students
attending UK higher education institutions has fallen
by 34% between 2009 and 20138, largely due to
the development and increased availability of Indian
universities.
At the same time, a parallel trend has started taking hold
in the opposite direction, with students from all over the
world coming to China to enrol in Mandarin courses. For
the past few decades, foreign students have increasingly
flocked to the UK to learn English, often later returning
to the country for their university studies. The increased
numbers of foreign students visiting China to take
Mandarin courses could also be a precursor for China’s
rise to become a global education provider.
The surged interest in Mandarin on a global scale can
be attributed to both supply and demand factors. The
financial support from Beijing has made the learning of
Mandarin more accessible to foreigners through cultural
diplomacy with the rolling out of the Confucius Institutes,
a network of non-profit public institutions affiliated with
the Chinese Ministry of Education. These are tasked with
promoting Chinese language and culture, supporting
local Chinese teaching internationally, and facilitating
cultural exchanges. Since 2004, more than 300 Confucius
Institutes have been rolled out in 93 countries and
regions9. Hanban, the Office of Chinese Language Council
International, aims to establish 1,000 Confucius Institutes
by 2020.
economic insight – Gre ater Chin a
Q3 2 014
The figures are even more staggering for the US market.
According to the US-based National Association of
Realtors (NAR), Chinese citizens14 are now the top foreign
buyers of US residential property in value terms, with the
estimated investment for the latest year15, shown in Figure
5, being $22bn. This is approximately a quarter of total
international sales in the States; almost 80% of that was
estimated to have been paid in cash.
Canada ranks ahead of China in terms of the number
of US property purchases. However, when it comes to
dollar value of sales, China ranked first as Chinese buyers
purchased more expensive homes than Canadian buyers.
The median price of properties purchased by the Chinese
was $523,000, more than double the $213,000 for
Canadians. Buyers from India, Mexico, and the UK were
also strong investors in US residential property, though
stand far below Canada and China in terms of the total
value of purchases.
Figure 5: Foreign purchase of US property in 2014,
total value of transactions (LHS), and median price
(RHS), current USD
600,000
Current USD billions
400,000
300,000
10
200,000
5
0
100,000
China
Canada
Total Value
India
UK
Mexico
Median price
Source: National Association of Realtors
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0
Current USD
500,000
15
5,500,000
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
Q1 2014
Q1 2013
Q1 2012
Q1 2011
Q1 2010
Q1 2009
Q1 2008
Q1 2007
Q1 2006
Q1 2005
Q1 2004
Q1 2003
Q1 2002
2,000,000
Q1 2001
China’s foreign exchange rules cap the maximum amount
of yuan that individuals are allowed to convert at $50,000
each year, and ban them from transferring the currency
abroad directly. Despite this, billions are regularly
transferred every year by wealthy Chinese individuals,
eventually making their way onto foreign real estate in
markets such as in the UK, the US, Canada and Australia.
The Australian Foreign Investment Review Board reports
that the Chinese have become the biggest investors in
Australia’s commercial and residential property, with
purchases surging 42% to AUD 5.9bn in the year to June
201313.
20
Figure 6: London house prices in CNY terms
Q1 2000
Chinese citizens the top buyers of US
residential property
25
A likely reason for the great appeal of overseas residential
purchases by Chinese investors is the continued
appreciation of the yuan against foreign currencies such
as the US dollar and the British pound, which has made
property in those countries more affordable for Chinese
buyers. For example, as Figure 6 shows, London prices
remain below their pre-crisis peaks in yuan terms. In sharp
contrast, in GBP terms they already exceed their pre-crisis
peak by almost 30%. London property – a perceived safe
haven investment – remains highly attractive to Chinese
savers.
CNY
On the demand side, many students (and their parents)
outside of China view the learning of Mandarin as an
important investment in securing brighter job prospects
in the future, given the expectation for China to become
the world’s biggest economy by 2030. In the UK, the
number of students studying Chinese at university almost
tripled in the past decade10, while in 2011 the number of
Chinese A-level exam entries in England and Wales rose
by 36%, the fastest of any major language11. In the US,
around one in 30 elementary schools offered the option
of learning Chinese as a foreign language12, up from 1 in
300 in 1997. To the developing world the benefits that
come with learning Mandarin, and especially the prospect
of an affordable education and of finding work in the
world’s second largest economy are even more attractive:
as an indication, the Sindh province in Pakistan has
revealed plans to make Chinese studies a compulsory part
of the school curriculum.
Source: Office for National Statistics, Cebr analysis
At home, China’s real estate sector is
slowing down
We now shift our attention back into China, to what
is perhaps the ultimate investment for the ordinary
household: the domestic residential property market.
China’s real estate sector has continuously been identified
as a source of concern, with surging prices prompting
suspicions of overheating. House prices in many Chinese
cities rose at close to double-digit rates in 2012 and 2013,
but have since showed signs of easing. According to data
for June 2014, new-home sales prices declined in 55 out
of 70 cities compared to May16. Housing sales in the three
months to June 2014 have dropped by nearly 10% year
on year, and construction of new floor area for residential
properties has been falling at a double-digit pace in the
first half of 201417.
The cooling of the property market has largely been the
result of policy efforts to control rising prices. Since 2011,
more than 40 cities have imposed restrictions on home
ownership such as limiting the number of units each
household may own, or imposing limits on mortgages for
first-time buyers and minimum residency requirements for
purchasing property in first-tier cities such as Beijing and
Shanghai.
However, with concerns that the housing market will
collapse, many cities have started to reverse policy to
give a boost to the property market. Falling house sales
have discouraged developers, who have scaled back on
the purchase of land. This has led to a fall in revenues for
local governments for which land sales have tended to
form a major source of income. Hohhot, the capital of
Inner Mongolia, was the first city to end all restrictions
on home purchases in June 2014. A month later it was
followed by a similar move in Jinan, the capital of the
Shandong province in eastern China. The Hebei provincial
government was the latest to relax restrictions in late July
by announcing that there will be no personal income tax
on sales of apartments owned for at least five years.
Looking ahead, similar moves are likely in other cities,
especially in those where supply is exceeding demand and
economic insight – Gre ater Chin a
Q3 2 014
in those most dependent on land sales for revenue.
As Figure 7 shows, at a national scale the outstanding
stock of unsold properties has been rising at double-digit
rates since 2011, when the first measures to cool the
market were imposed. The high level of inventories is the
main factor behind price falls as developers have started
to cut prices to boost sales.
Figure 7: Residential buildings waiting for sale
(vacant), YTD aggregate figure (excludes January)
(LHS), and year-on-year % change (RHS)
%
50
400
45
350
40
35
250
30
25
200
20
150
15
100
10
50
Aggregate
Jun 2014
Apr 2014
Feb 2014
Oct 2013
Dec 2013
Jun 2013
Aug 2013
Apr 2013
Feb 2013
Oct 2012
Dec 2012
Jun 2012
Aug 2012
Apr 2012
Dec 2011
5
0
Feb 2012
0
Year-on-year change
Million buildings
300
% change
Source: National Bureau of Statistics of China
The picture is more mixed in Hong Kong: after almost two
years of average house prices growing at a double-digit
pace, the real estate sector has begun to see some signs of
cooling since the start of 2014. Year-on-year growth in the
Residential Real Estate Price Index compiled by the Hong
Kong Rating & Valuation Department has slowed to a
mere 2% according to the latest data for June 2014, down
from 19% in June 2013.
As has been the case in China, the cooling of the Hong
Kong property market can also be partly attributed to
government policy. During the extraordinary performance
of the market between 2008 and 2013, which was driven
by low interest rates and strong demand from mainland
China, and which resulted in the doubling of house prices
in the period, the government took a number of measures
to prevent further overheating of the property market.
These included a cap on the maximum mortgage loan
to HK$12m, and a limit of the loan-to-value ratio to 70%
in 2009. The Hong Kong Monetary Authority further
introduced a cap on debt servicing at 50% of net income
in 2010 and a doubling of the maximum stamp duty to
8.5% in 2013. The number of transactions then fell to a
near 20-year low of just over 50,000 in 2013 according to
the Land Registry of Hong Kong. This could be attributed
to the surge in sales tax in 2013, and the latest data show
that the market has started to pick up pace again as of
late, with transactions rising at double-digit pace since
April 2014.
China on course to meet annual growth
target of 7.5% in 2014
The pace of growth in mainland China is expected to
gently slow over the three coming years as its economy
matures in a structural manner. The cooling of the
property market is one factor likely to hold growth
back this year. Weaker export growth is also expected
to act as a drag on growth but the offsetting effect of
government stimulus should help the economy meet
the official target of 7.5% for economic expansion. A
mini-stimulus performed in March 2014 allowed China’s
year-on-year growth in GDP to accelerate to 7.5% in the
second quarter of the year, slightly up from 7.4% in the
first quarter. Importantly, the mini-stimulus took the form
of spending on infrastructure, rather than raising liquidity
through the credit mechanism. A modest debt-to-GDP
ratio of below 30% gives the Chinese authorities plenty
of fiscal room to provide more stimulus further down
the road this year, to ensure that the target growth rate
of 7.5% is achieved. Beyond this year, though, growth is
expected to decelerate to 7.2% in 2015 and 6.9% in 2016
as the metamorphosis towards a more consumption –
rather than investment-driven growth model continues.
Macau’s economy is expected to pick up significant pace
in 2014 and achieve annual growth of 12.2%, up from
10.5% in 2013. Gambling revenues, which account for
over half of GDP, rose by almost a fifth over the course of
2013. A rebound in the global economy and continued
strong growth in Macau’s neighbouring mainland China
are expected to sustain a strong performance by the
gambling industry and keep the economy expanding at
double-digit rates throughout the forecast period. A minicycle is expected, with growth gently slowing to 11.4%
in 2015 before picking up pace again to reach 11.8% in
2016, boosted by the expected opening of the HongKong-Zhuhai-Macau bridge and the associated increase in
cross-border traffic.
Output expansion in Hong Kong is expected to accelerate
as the recoveries in the developed economies of the US,
the UK and even the eurozone pick up pace, benefiting
Hong Kong through the channel of increased demand for
its exports. We expect growth to accelerate to 3.8% in
2014 and remain fairly steady and solid throughout the
forecast period as the recoveries in the developed world
gain an even stronger foothold.
Overall, Chinese economic prospects look fairly solid,
with a managed slowdown to growth which is more
sustainable in the long run. There are some concerns in
areas such as the residential property market, though
Chinese policymakers are intervening to address these
issues. Global economic conditions for the most part
should support Chinese expansion. However, despite
the advanced economies returning to stronger growth,
there are some notable risks to overseas demand for
Chinese goods and services. Although the economic
situation in the eurozone appears to be improving, it
remains relatively frail and some major economies in the
currency area such as France have shown a disappointing
performance of late. Geopolitical crises in the Middle
East, Russia and Ukraine are also potential threats to
global economic stability and have created considerable
uncertainty.
Figure 8: Greater China GDP growth forecasts
14
12
10
8
6
4
2
0
Mainland
Hong Kong
2014
2015
Macau
2016
Source: Cebr forecasts
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economic insight – Gre ater Chin a
Q3 2 014
1 China – A primer on banks’ wealth management, Standard Chartered Global Research (2014)
2http://online.wsj.com/articles/chinese-snap-up-government-savings-bonds-1404992217#printMode
3 China’s gold market: progress and prospects, the World Gold Council (2014)
4 Does not include Hong Kong
5 ‘Strategies for Gold Reserves Replacement’, SNL Metals & Mining (2014)
6 United Nations Population Prospects
7 Student visitors are issued with a visa for a maximum of six months in duration, or in a very small number of cases for
11 months if studying an English language course. Student visitors are not counted as long-term migrants and cannot
extend their stay, so are not counted as part of the study visas immigration statistics.
8 Cebr analysis of data provided by the Higher Education Statistics Agency (HESA)
9http://www.chinesecio.com/m/cio_wci
10 Cebr analysis of data provided by the Higher Education Statistics Agency (HESA)
11http://www.ft.com/cms/s/0/73c7e4c8-e527-11e0-bdb8-00144feabdc0.html#axzz392IxhpbO
12 ‘Foreign Language teaching in US Schools’, results of a national survey compiled by the Center for Applied Linguistics
13 Foreign Investment Review Board Annual Report 2012-2013
14 Includes buyers from Mainland China, Taiwan, and Hong Kong
15 March 2013-March 2014
16http://www.stats.gov.cn/english/PressRelease/201407/t20140718_583878.html
17 Cebr analysis of National Bureau of Statistics data
For enquiries or additional information, please contact:
Vivian Yu
T +86 10 8518 8622
E [email protected]
Cebr
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