China's Booming Economy

I have just returned from China at the end of our latest BRIC+ Study Tour China, a one-week program of briefings, presentations, site visits, activities and workshops for a leading group of Australian investment professionals on their first visit to Shanghai and Beijing.

This was my first visit to China since the Global Financial Crisis (referred to in China as the “American Financial Crisis”!) but the signs of confidence, growth and national pride are everywhere.

Here follows a summary of my key learning and observations from the visit:

1. China’s economy is booming

The evidence is everywhere – in construction, infrastructure, property, retail and large scale manufacturing. China’s economy seems certain to maintain its average growth rate of 8.5% p.a since 1978, despite the dire predictions of late last year, and 2009 will surely be remembered as the year in which China “de-coupled” from the US. To use a well worn analogy: the train has most certainly left the station – either get on it or get out of the way!

2. The Chinese Government is making all the right moves to ensure confidence, stability and national pride in the country’s achievements

The timing, size and impact of last year’s US$586 billion stimulus package has delivered an immediate return to the economy but the greatest benefits have been delivered in so many other ways, including:

* the upgrade in infrastructure in the first tier cities, notably Shanghai and Beijing, which are now as impressive as any city in the world

* the investment in the second tier cities (I made a brief visit to Ningbo prior to the commencement of the BRIC+ Study Tour) is large, significant and impressive and will ensure that the wealth, opportunities and infrastructure are also available to the residents of hitherto unknown cities like Chongqing (population 30m), Dalian, Hangzhou, Tianjin, Ningbo and many others.

* The English language is widely spoken at all levels of society, particularly amongst the younger generations. This was particularly noticeable in Beijing, presumably in the wake of last year’s Olympic Games, which appears to have become a truly international city compared with only years ago.

* the quality of service in shops, hotels, restaurants and even in the markets is now at an international level. Many regular travellers to China (myself included) used to complain that, whilst the “hardware” (ie hotels, airplanes, shops, roads) was often world class, the “software” (ie service, language, skills, training, attitude) was lacking. This is now changing very rapidly.

3. Domestic Consumption is rising rapidly

This is the great test for China. With the collapse of its exports to the developed world, can it consume enough internally to maintain its momentum? The signs are encouraging on the streets of Shanghai and Beijing, with the shops busy and every sign of western-style consumerism, plus the data is positive in terms of household income and expenditure, consumer sentiment, confidence and other leading indicators (eg use of credit cards). But the greatest indicator of increasing domestic consumption and confidence is the sale of motor vehicles which are exceeding even the most positive expectations. Consider the following facts and figures:

* Overall car sales are growing strongly, up 20% in the first half of 2009

* Luxury car sales are up 7% for the first half of 2009 (a time when the rest of the world was shunning luxury purchases of any kind)

* Sales of Mercedes cars are up 50%, and China is now the No. 1 market in the world for the Mercedes S-Class, their high-end flagship vehicle

* Ferrari sold more than 200 cars in China last year

* 80% of all Rolls Royce car sales in China are custom built, higher than in any other market, with customers adding humidifiers, single rear seats, backseat entertainment options and refrigerators to ensure maximum comfort and status

4. China is leading the world in renewable energy sources

This was a particularly surprising aspect of our recent visit. We learnt that China is now producing more solar energy than the rest of the world put together (by some distance apparently!) and this was certainly evident in Beijing with many of the street and highway lights powered by solar panels which were evident along the side of the road. We also read that China plans to build seven large wind-power bases over the next decade and, whilst China’s energy needs are expected to double by 2030, it could reasonably expect to meet at least half of those needs from wind power.

5. The Private Sector is growing rapidly

China is now shaking off its image as a country dominated by a small, lumbering collection of large state owned companies, with all of the associated risks, challenges and restrictions for foreign investment and trade, and an increasing number of opportunities now exist in the private sector. Private companies in the US$5m to US$50m turnover range were identified as representing the most interesting investment opportunities at the moment.

6. China is going global

I was the guest speaker at an investment forum held at [http://www.creativity.net.cn/en/index.htm Innovation Valley] in Ningbo at which over 70 companies attended to learn how to take their businesses offshore, with a particular focus on Australia as a business and investment destination. I gather similar forums are being help throughout China as the country seeks to implement its new “Going Out” strategy (announced in July 2009) to diversify its foreign reserves and increase its share of global exports.

7. China is moving up the value chain

We learned that China is looking to upgrade the quality of its exports by moving into higher value manufacturing capabilities. Therefore, the development of technology-led sectors and high-value capabilities has become a key policy focus. In this respect, the collapse of low value exports to the developed world is a blessing as it has forced the whole country to accelerate its move down this path.

8. Australia is not taking China seriously enough

In conversation with many Australian Chinese and expatriates living in China, I was surprised and dismayed to hear the view that Australia is losing out to the US, Japan, Korea and European countries by not taking China seriously enough. It seems that, whilst many Australians coming to China to “take a look”, very few ever come back again to do something serious. Australia’s exports to China are dominated by our resources sector (which represents only 6% of our GDP) which means that there is significant potential to export the other sectors of our economy, especially those in which we offer innovative processes, technology and world-class products and services.