China poised at ‘triple transition’ point

Over many years of ‘China watching’, JP Morgan’s chairman of China equities Jing Ulrich has acquired a reputation as someone who sees emerging trends more sharply than most others, and is regarded as the “unofficial voice” of China.

That reputation - and the fact that she maintained a distinctly upbeat outlook on China’s economy even last year, when the global financial crisis was in full play - occasionally lands her in unusual situations.

“In March 2009, I addressed some 600 JP Morgan clients in Paris,” Ulrich recalls. “I said at that time that China would come out of the crisis in stronger shape.”

But at the end of her talk, a somewhat sceptical client stood up and wondered aloud how she could be so upbeat about China when the global economy was “mired” in recession.

“Do you, by any chance, work for the Chinese government, and did they tell you to give put out this message?” he asked.

Fast forward to today, 15 months later, and Ulrich believes that her bold call on the Chinese economy has been validated by the country’s robust economic performance since.

Last year, China more than met its 8% GDP growth target, and in the first quarter of this year, it raced further ahead to 11.9% growth.
China, she adds, has registered a V-shaped recovery, on the strength of its “unique strengths: an unparalleled political determination and virtually unlimited financial resources.”

China is today the world’s No 1 exporter, the second-largest importer (after the US) and the third-largest economy (after the US and Japan; it is expected to surpass Japan later this year). And looking ahead, Ulrich sees three key trends that will shape the outlook for China’s future.

First, Chinese government policy is shifting from one of being “ultra-expansionary” to a more “neutral” stance.

Second, the government, which was supportive of the property sector last year, has since early this year shifted its focus to containing asset bubbles and property speculation. And, third, the focus of investments is shifting away from state-driven, large-scale projects towards more private consumption and investments.

The combined effect of this three-pronged transition will place China on a “new phase” of the post-crisis period, which will position it for sustained recovery, adds Ulrich.

And just as the Chinese government pulled out its big guns — “unparalleled political determination and virtually unlimited financial resources - overcome the crisis, so also will it invoke those strengths to “drive growth ahead and navigate the complex economic environment.”

In response to the challenge of inflation, which is “coming back with a vengeance” and is probably “not captured” sufficiently in official inflation data, Ulrich expects China’s central bank to raise interest rates, perhaps as early as next month, in order to control excess liquidity and avoid risk of overinvestment.

The lingering credit crisis in Europe will have a negative impact on China, given that Europe is today China’s biggest export market, but Ulrich reckons that the shortfall will be made up for by increased exports to emerging markets, including India.

She also believes that the “time is right and opportune” for China to consider allowing the renminbi to appreciate, given that the Chinese economy has recovered sufficiently, and such a move would also fit in with the larger policy goal of taming inflationary concerns and boosting private consumption.

“It will strengthen Chinese consumers’ purchasing power, and will be a major theme in the global economy in the future.”

Ulrich sees two other growth drivers at work in China’s economy: the rapid pace of urbanisation, and the extensive network of high-speed railway, which is “shrinking China’s size” and facilitating “geographic and upward mobility” of Chinese people.

“Just as the US rail network transformed the American continent 150 years ago, so also will China’s network of high-speed railway, which is expected to double to 13,000 km by end 2012, transform Chin’s continental economy,” says Ulrich.

In particular, inland regions will benefit, as manufacturers move away from the expensive coastal areas, and this, in turn, will bridge the wealth gap.