Ian Gomes: China is coping with downturn

Jun 25 2009 By Ian Gomes

China expects to return a growth rate of between 6.5 per cent and seven per cent this year. No matter that this is a significant climb-down from the double digit rates of the past few years – in a world of barely positive growth, this is really impressive.

However, the real questions are, will it last and is it enough?

The manufacturing sector accounts for over 40 per cent of China’s GDP. However, just as in other countries, the sector in China has been hit hard by the current economic climate to the point where we have recently witnessed the first waves of factory closures and bankruptcies.

The fortunes of the manufacturing sector are inextricably tied to western demand: the US and Europe have previously accounted for almost 40 per cent of Chinese exports. So if global demand does not return to previous levels, then it is difficult to see how growth can be sustained at current levels unless government spending spurs domestic demand.

Last November, the government allocated nearly $590 billion to stimulate the economy over the next two years. This has set off a race by local governments to spend on new infrastructure projects. In contrast to stimulus programmes by developed countries, China can afford this without any new borrowing.

State directed lending has ensured that banks have lent over $650 billion in the first quarter of 2009 – more than was lent in the whole of last year. Some financial commentators have reported suspicions that a significant share of this money has been directed at marginal manufacturers who without these funds would have gone to the wall. Only time will tell if the economy has the capacity to turn these new loans into real activity.

Government measures will undoubtedly help, but it is ultimately down to the Chinese consumer to drive sustained growth. Domestic consumption accounts for one third of GDP and, culturally, the Chinese are savers not spenders. The majority of the population is poor and while GDP growth soared over the last decade, per capita income has not shown anything like the same trend and it is the response to this challenge that will determine China’s future growth rates.

For now, however, the early signs are good with household spending picking up – car sales in the last two months saw a 30 per cent increase and house prices were also edging up. Sales of white goods have increased, helped along by incentives.

So on the whole, China seems to be coping well in the face of global recession. However, to return to the path of at least nine per cent growth and to absorb the 24 million new workers who seek employment each year, China’s consumers will need to see higher incomes, in addition to learning to save less and spend more on a sustained basis. Time will tell.

* Ian Gomes is chairman of KPMG’s high growth markets practice.