China economy

Growing pains to be expected as China works to join the club of developed economies

Thomas Deng says China is taking the hard route of change to spur innovation and transform its slowing economy, but it is the right decision

PUBLISHED : Wednesday, 04 November, 2015, 2:10pm
UPDATED : Monday, 30 May, 2016, 5:09pm

China's per capita GDP is nearing US$7,000 after over three decades of dramatic economic growth. As it aims to graduate and join the club of developed economies with over US$10,000 per capita GDP, it needs to first transform its growth model.

Specifically, it must upgrade the economy via technological innovation, green development and price liberalisation as well as streamlining bureaucracy and reforming mammoth state-owned enterprises.

The new China should clock in at a modest 6-7 per cent GDP growth and will endeavour to reach targets with the help of accommodative fiscal and monetary support. This more mature China is in for a bumpy ride, as we have seen with the summer's A-share equity rout, burgeoning stockpiles of inventory in property and industrials, and disappointing economic indicators.

It's also much more difficult when the transitioning country is the second-largest economy in the world and a vital linchpin for global growth 

Investors and observers are now speculating as to China's mojo: has it been lost completely or is it dormant, awaiting stimulation from new sources of growth? It may well be a combination of both: China will never again reach breakneck speeds but its new vehicle for growth travels down a much more sustainable and safer road.

Structural rebalancing is never easy, but it is necessary for economies that seek to evolve from an investment-dominated to a consumption-led model.

It's also much more difficult when the transitioning country is the second-largest economy in the world and a vital linchpin for global growth - near-term growing pains should be expected.

READ MORE: ‘Innovation imperative’ the key to China’s economic success over the next decade, analysts say

China's vision for its domestic economy is summarised in the "Made in China 2025" scheme, which aims to convert China from a low-cost manufacturing hub to a hi-tech engineering giant. This ambition is beginning to materialise in the nascent biotech and transport fields. Another important development that should accelerate transition is the reform of the hukou system. The core objectives are to speed up urbanisation and ease unfavourable demographic trends.

These initiatives should keep China's two-speed economy - faster growth in services, slower growth in industry - intact by firing up the new economy while working off the excesses of the old. Key beneficiaries that may drive the next capital expenditure cycle include alternative energy, healthcare, education, e-commerce and logistics, technological innovation and infrastructure.

So, we should applaud China's mature decision to opt for the harder route of change, and get ready to celebrate its graduation - even if it means saying "so long" to the golden days of the 2000s.

Thomas Deng is UBS regional chief investment officer for Greater China and chief China strategist