Want a financial tip? Expect the unexpected

PUBLISHED : Friday, 29 June, 2012, 12:00am
UPDATED : Friday, 29 June, 2012, 12:00am


On 1 July 2007, the South China Morning Post looked back at the 10 turbulent years that had elapsed since the handover and made one firm prediction about the city's economic future: it would be volatile.

That forecast holds up equally well today: whatever else happens over the coming years, the unexpected will be inevitable.

Yet if you were to listen only to economists and professional forecasters, you would come away with the impression that our future is pre-destined; that Hong Kong's economic development will be a smooth, orderly progression, with outcomes that can be divined simply by extrapolating current trends over the coming decades.

These predictions are certainly wrong. Just look at the government's own forecasts for the city's future. If you were to believe the Census and Statistics Department, even with no increase in productivity or average income, Hong Kong's economy will grow 25 per cent in real terms over the next 25 years.

That's because the government's demographers expect the city's population to rise by 1.7 million, from 7.1 million last year to 8.8 million in 2037.

Yet examine the government's figures in more detail, and it soon becomes apparent that its population projections are not so much unrealistic as fantastic.

The government's population forecast is based on an average increase between now and 2037 of 93,000 babies a year - close to last year's 95,000 births.

But the number of babies born in the city last year was effectively only 58,000 because 37,000 were born to mothers from the mainland.

If the government now bans birth tourism, as seems likely, the number of births will fall about 40 per cent. As a result, Hong Kong in 2037 will have about one million fewer people than the government projects.

Actually, it will be even smaller. The government forecast also relies on net immigration of 29,000 a year, based on the assumption that 54,750 one-way permits will be taken up each year by mainlanders wishing to join family members.

This figure looks wildly exaggerated. Over the past 10 years net immigration has averaged less than 2,000. And with a ban on mainland mothers, there will be fewer family reunions in the future.

Factoring in the rising age of Hong Kong residents, which means fewer births and more deaths, it appears likely that the city's population will not increase by 1.7 million, as the government expects, but that it will be flat or that our numbers could even fall slightly over the next 25 years. As a result, forecasts of economic growth based on official demographic projections look badly wide of the mark.

But although economists are fond of saying that demographics are destiny, they are not everything. Hong Kong's growth prospects also depend on the city's role as a service centre for China's rapidly expanding economy.

If you believe the majority of forecasters, that's an enviable niche to occupy, with mainstream projections showing China continuing to grow at near double-digit annual rates to overtake the United States as the world's biggest economy well before the end of this decade.

Unfortunately, simple arithmetic means assumptions that these straightforward linear extensions of China's past growth will trend into the future are also sure to be proven wrong.

The problem, as Premier Wen Jiabao admitted as long ago as 2007, is that China's growth is 'unstable, unbalanced, unco-ordinated and unsustainable'.

What troubled Wen back then was the disproportionate role of investment in powering China's economic development. Today the imbalance is even worse. Last year fixed investment accounted for 4.9 percentage points of China's 9.2 per cent growth rate, and made up 46 per cent of overall gross domestic product. Consumer demand contributed just 35 per cent of GDP.

No other major economy in history has experienced such a distorted growth mix. Not even in Japan or South Korea at the height of their own growth booms did investment ever exceed 40 per cent of GDP.

Beijing's economic policy-makers realise things can't go on like this. The government's latest five-year plan aims to rebalance the economy, weaning China off its long-standing addiction to high levels of investment and promoting private consumption as the principal driver of growth.

But there's a catch. Consumer spending is already growing at a break-neck pace, shooting up by a real 10 per cent last year. Persuading people to spend at a faster rate will be difficult, if not impossible. And there is always the danger that a successful attempt would merely stoke inflation.

As a result, China cannot rebalance its economy via accelerating consumption but only by slowing investment. And given that investment is a much bigger component of GDP than private consumption, meaningful rebalancing can only be achieved by a steep fall in investment growth. Inevitably, that must involve a deep drop in China's overall economic growth rate.

For example, if consumption were to continue to grow at its current rapid pace, reversing the proportions of investment and consumption over the next 10 years so that China's economy consisted of 35 per cent investment (which is still sky-high by international standards) and 46 per cent private consumption would need investment growth to slow from a real rate of about 12 per cent last year to just 4 per cent. That would mean the overall growth rate would slow to just 7 per cent a year.

Except of course, such a steep fall in investment growth would mean smaller pay rises for many workers, which would drag down the growth of consumer spending. As a result, GDP growth would drop below 7 per cent: the working definition of a hard landing.

That may be unpalatable, but the alternative - maintaining high investment rates until diminishing returns on capital trigger a financial crisis and a far harder landing - is even less attractive. Either way, China's growth rates will slow over the coming years, which means it is likely to take it at least 10 years longer than most forecasters think to overtake America as the number one economy.

That will leave lots of economists with egg on their faces, but for the world as a whole, slower Chinese growth would be a good thing.

It's now five years since China overtook the US as the planet's largest emitter of greenhouse gases, and today it is responsible for more than a quarter of carbon dioxide emissions from burning fossil fuels.

In response to fears of global warming, governments around the world have pledged to reduce their emissions. By 2020, the European Union promises to have cut its greenhouse gas output to 20 per cent below 1990 levels. The US has said it will reduce its own emissions to 17 per cent below 2005 levels.

China has made a commitment too, pledging to reduce its carbon intensity - the amount of carbon dioxide it pumps out for each unit of economic output - by 40 per cent compared with 2005 levels. Meanwhile, India has promised a 20 per cent reduction in carbon intensity.

Those sound like generous undertakings. But pledging to cut carbon intensity is not the same as a promise to cut emissions. Even if China and India do reduce their carbon intensity, as long as their economies continue to grow rapidly, their greenhouse gas emissions will continue to rise.

In fact, a quick back-of-the-envelope calculation shows that even if every country that has made a pledge - including China and India -meets its commitments in full, for overall global emissions to peak by the accepted 2020 deadline would require economic growth rates in China and India to fall to just 1 per cent a year.

That's unlikely to happen. But still, from the point of the world's environment, the slower China's growth, the better.

Of course, the problem with all these projections is that they rely on exactly the same sort of linear extrapolations that they are intended to discredit.

But they still illustrate a valid point: all forecasts are deeply unreliable. The only thing we can say with any certainty about the future is what we said five years ago: it will be unpredictable.


China's gross domestic product in US dollars in 2011, according to the IMF

-The US GDP for 2011 was US$48,387