here are four reasons Chinese growth may be better than expected — from an unlikely source: Ian Russell, president of the Investment Industry Association of Canada. Mr. Russell took some notes from the recent Asian Financial Forum in Hong Kong, where he says delegates “were probably surprised” by the many presentations “pointing to an optimistic near-term outlook.”
Reason 1: Fears that China’s export sector will sputter due to a loss of competitiveness and rising labour costs are overblown. Sure, some lower paying work may migrate to poorer countries in Asia, but China is starting to move into more profitable, higher value-added manufacturing that requires skilled and more pricey labour.
Reason 2: A growing middle class numbering 300 to 400 million people will trigger substantial consumer and investment spending. A knock against China has always been that its economy is overly dependent on exports and investment. But China is changing quickly and growth is about to be boosted by the needs of its increasingly wealthy middle class.
Reason 3: China tightened the monetary spigots because of worries about inflation. But prices seem to be under control and the housing market has cooled. Residential construction could come roaring back to its traditional 40 per cent share of fixed investment from the currently depressed 35 per cent. This would add several percentage points to growth.
Reason 4: The government will boost stimulus spending should it be needed. Those fearful of a hard landing have to keep in mind that the government has shown itself to be adept at intervening at key points to keep growth buoyant.
This view contrasts sharply with the detailed analysis we pointed to the other day. Who is right? Hard to say. It’s interesting that the US is suing S&P for not warning the world that housing was about to collapse in 2006. That suit, which seems politically motivated for at least two reasons, will no doubt find emails and documents that question the sustainability of the housing boom. But, really, did you think that housing was about to collapse in 2006?