Barclays Capital: China: Beyond the Miracle
Part 1 - China's Next Transition
Date: 5 Sep 2011
Language: English
Format: PDF
Pages: 26
By: Yiping Huang/Jian Chang/Lingxiu Yang

* We think China is about to experience a transition from ‘economic miracle’ to what can be considered normal development in the next five to ten years. This process will not only transform the Chinese economy, but will also have significant implications for the rest of the world.
* The key to the upcoming transition lies in the anticipated reform of factor markets, including rapid wage growth, interest rate and exchange rate liberalisation, and market-based resource prices.
* We identify a number of important trends that will emerge during the transition process. Growth is likely to moderate steadily, economic cycles will probably become more violent, and inflation pressures could escalate, as a result of widespread increases in factor costs.
* Industrial upgrading is likely to accelerate, with a rapid move into high value-added manufacturing and service sectors, and faster development of inland provinces. We also expect income distribution to improve.
* The economy should see the beginning of great rebalancing, which is likely to mean an end to investment-led growth but much stronger consumption. As a result, demand for commodities could slow.
* China will likely achieve basic convertibility of the capital account over the next five years, and its capital outflows are likely to primarily take the form of direct and portfolio investment.


Barclays Capital: China: Beyond the Miracle
Part 2 - The Coming Financial Revolution
Date: 5 Oct 2011
Language: English
Format: PDF
Pages: 27
By: Yiping Huang/May Yan/Jian Chang/Lingxiu Yang/Shujin Chen

* The financial system remains largely ‘repressive’: financial institutions act more like policy entities; key interest rates are tightly regulated by the state; and the non-state sector’s access to funding is highly restricted.
* Repressive financial policies are restraining growth and driving many of the risks fuelling fears of a hard landing. Failure to address financial reform soon could lead China to experience the same fate as many other emerging market economies that saw their growth paths derailed.
* However, we believe China will avoid such a path. We expect its long-awaited financial ‘revolution’ to start sooner than some expect and last over a period of five years. This will include the reform of policies covering interest rates, debt markets, financial products, corporate governance and the capital account.
* Costs of capital are likely to trend higher as China reduces financial repression and rebalances its economy. For some borrowers, this should mean improved access to funding and lower costs.
* Institutions will likely be exposed to greater financial volatility and large adjustments in both prices and allocation of capital could point to significant financial risks. Careful design and implementation of financial reform and regulation will be key to ensuring a smooth transition during this period and minimising the risks of a financial crisis.
* China banks will likely face a strong challenge from deregulated debt markets and interest rate competition, which may force changes in their business models.


Barclays Capital: China: Beyond the Miracle
Part 3 - Bubble Deflation, Chinese Style
Date: 8 Nov 2011
Language: English
Format: PDF
Pages: 29
By: Yiping Huang/Jian Chang/Lingxiu Yang

* Past property booms were supported by strong income growth, steady
urbanization, favourable demography, limited investment alternatives and
healthy household balance sheets.
* These factors, however, may turn into negatives in the coming years, generating
significant risks of a bubble bursting.
* Restrictions on housing purchases are only a second-best policy option. But they
have been effective in lowering property prices and reducing future risks of a
bubble bursting.
* We expect property prices to decline by 10-30% during the current cycle, which
should not lead to systemic crisis or collapse.
* Households are not likely to be forced to sell, while large developers could
survive the downturn. But small developers will probably suffer from significant
financial stresses.
* Policy may be adjusted if the average price decline approaches 20%. And the
longer-term agenda is set to replace restrictions on housing purchases with
property taxes.
* Weakening property markets should slow investment significantly, impacting the
global commodity market. But Chinese consumers are likely to stay relatively
more resilient.