What is driving China´s growth?

The key to China’s economic growth isn’t “how fast?” or “how much?” The most critical question is “what’s driving it?”.

Most people think that China’s current economic status is a mirage created by government stimulus and relies on exports. However, examination of China’s economic growth over time reveals that consumption and gross capital formation are the two pillars lifting China to the top.

Balance is also a crucial goal for China’s economy – the economy must not grow too quickly or risk a sharp correction. Just this year, China has weathered an epic battle with inflation, drought and floods, poor global macroeconomic conditions, massive accounting/corruption scandals and a tragic accident on one of its marquee achievements-the country’s high speed rail system.

China remains the beacon of hope for the global economy, the largest and, many times, the “sole engine of the world economy,” BCA Research says. China’s real gross domestic product (GDP) is forecasted to grow 8.9% in 2011 and 7.8% in 2012, according to ISI Group. This is a slower rate of growth compared to recent years but “doesn’t look like an economy struggling under tighter credit conditions,” research says.

Ending the country’s dependence on exports is the “professed pursuit of quality over quantity,” says GaveKal and became an immediate necessity for China to maintain economic stability after exports collapsed by 40% from September 2008 to January 2009, triggering a sharp slowdown in growth, BCA says. Recent data shows China has kicked the habit as exports have contributed little to the country’s growth in 2011. Net exports accounted for 18% of China’s total 14.2% GDP growth in 2007, according to CLSA’s Andy Rothman. During the first half of 2011, exports have a negative contribution of -0.7% of China’s 9.6% GDP growth and accounted for only 12% of total industrial sales revenues. We’ll debunk more tall tales of China’s export economy in a moment.

Transitioning Workforce and the Importance of Housing in China

While China’s “ghost cities” have stolen headlines, China’s real estate market sits on a much stronger foundation than China bears would have you believe. In reality, the property market is actually in a much healthier position than it was at the start of the year. CLSA says the government’s focus on keeping housing price growth under control and limiting the availability of mortgages has resulted in “none of the 70 cities monitored by NBS price increases of more than 1%” on a month-over-month basis in July.

Despite this relatively tame market, GaveKal cites Nouriel Roubini as saying these “ghost towns” are evidence that China’s excessive investment in capital stock has crossed a critical threshold – a bubble.

There are many questions surrounding the global market but the Chinese economy remains headed toward the moon. The country, of course, remains vulnerable to external forces but we believe the economy’s strong momentum will be enough to carry the country through, should volatile times persist.

Source: MoneyMorning