Swedbank Asia Analysis
21 November 2012
Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740e-mail: firstname.lastname@example.org Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson +46 (0)8-5859 7720.Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897
China’s strained economy – the new political leaders shouldfocus on reforms rather than stimulus
After a massive stimulus through the banks in 2008-2010, China is struggling withovercapacity and bad loans. The situation in the financial sector seems worse thanstatistics indicate. Many lenders are rolling over loans and hoping that the Chinesecentral bank again opens the spigot. In recent years China has borrowed from thefuture, and the question is whether it will choose the easy route with newinfrastructure investment or whether it will accept slower growth driven more byhousehold consumption. If the investment fervor continues, there will be a hardlanding down the road.
The economic turnaround now being talked about is based on meager gains andhopes of a new stimulus. A bottom may have been reached, but the recovery willbe cautious and vulnerable. We are revising our GDP growth forecast downwardfrom 7.9 percent to 7.7 percent this year and still expect it to stay below 8 percentin 2013 and 2014, in line with China’s goal of 7–7.5 percent in the coming decade.
The new political leadership is facing major challenges: corruption, a rebalancingof China's growth model from investments to consumption, a shrinking workforceand concerns about a middle income trap in the absence of innovation. Energyand the environment, urbanization and demographics, and international relations(including maritime conflicts) are also challenging the party and the military.
China’s leaders should show some backbone and reform rather than resort tomore stimulus. The question is whether the new leaders have enough interest inreforming or whether special interests will be allowed to maintain control andprotect the status quo. This applies especially to the continued deregulation of thefinancial sector. This report reviews why it is important and what could preventfurther development.
The global economy would benefit if Chinese growth were lower and moresustainable and if financial deregulation were fully implemented. Countries andcompanies that are stuck in the old business model will face increasing difficulty,while others could benefit from increased demand from China’s consumers asthey place greater value on quality and other long-term considerations.
Contents PageChina’s critical questions 2China’s economic outlook – just hopes? 3Challenges facing the new political leadership 7Deregulation of the financial sector: Why, why not and how? 12Consequences for the global economy 19