With China's growth moderating to an anticipated 7.8 per cent this year, some commentators think the country is set to experience a “hard landing”. We disagree. Both in the short and the long term, we expect China's remarkable economic success story to continue.
Chinese authorities have plenty of means at their disposal to stimulate the economy in the short term. So far this year, they have cut banks' reserve ratios, lowered interest rates and speeded up approvals for infrastructure projects, among other measures.
Many Chinese companies are already 'going out' by investing in Western institutions, such as Geely's acquisition of Volvo, or PetroChina and Sinopec taking stakes in Canadian energy firms
In 2013, we expect the Chinese authorities to continue to pursue monetary and fiscal easing, boosting domestic activity. Further European instability and a lacklustre US recovery would present challenges, but HSBC Global Research forecasts that China's growth over the 12 months will be 8.6 per cent. While slower than recent years, this will still be more than three times faster than the expected world average growth rate of 2.4 per cent.
In the longer term, sustainable, structural drivers will underpin continued growth.
First, the spending power of Chinese citizens continues to rise. This will support the government's goal of increasing domestic consumption. Second, China is the world's largest exporter and will consolidate its leading position in the coming years. By 2020, the Chinese Academy of Social Sciences anticipates the country will account for 19.5 per cent of global trade, roughly doubling its share over 10 years. And third, continued urbanisation will call for further investment in infrastructure such as power plants, road, rail and water systems.
Financial services companies can play their part in China's success story. Last year there were an estimated 1.2 million high net-worth individuals in China, who are likely to require international banking and wealth management services. As average income rises, many people will look for more sophisticated products to help them manage their money.
Financial institutions can also help China connect to the rest of the world. As well as providing basic services such as trade finance or foreign exchange, some are also putting in place dedicated support to facilitate commerce along fast-growing trade corridors. Companies in developed economies in North America and Europe can take a share in China's growth by exporting to its swelling middle classes.
While the trade links between China and developed economies will continue to be important, we also anticipate that trade routes between China and other fast-growing economies in Latin America, the Middle East, and elsewhere in Asia will expand rapidly.
Many Chinese companies are already 'going out' by investing in Western institutions, such as Geely's acquisition of Volvo, or PetroChina and Sinopec taking stakes in Canadian energy firms.
China's continued economic rise will be mirrored by a rise in the use and importance of its currency, the RMB. More than 10 per cent of China's international trade was settled in RMB in 2011. We think this proportion could rise to 30 per cent as soon as 2015, equivalent to about USD 2 trillion. As an investment currency, the RMB is also gaining momentum. With the government expected to announce further steps towards the currency's internationalisation, an ever-growing number of international companies are likely to seek to settle their accounts and raise capital in RMB.
So it would be a mistake to read weaker near-term economic conditions as representative of a longer trend. China's sustainable and structural drivers of growth mean that it remains a land of opportunity.
This piece is adapted from an investor presentation made by Helen Wong in November 2012.