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ECONOMY: Chinese Economy 2012 Review
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alt2012 marks the end of Hu and Wen’s era
Under President Hu Jintao and Premier Wen Jiabao’s leadership, the world’s most populous nation achieved remarkable economic success for the past decade. However, a long list of problems also emerged along with the economic success: exhausted exports and real estate sectors, private entrepreneurs choked out of the market, burgeoning inequality and corruption, and fears that reform by Mr. Hu and his team has been insufficient to underpin another decade of growth,  according to Wall Street Journal. 
 
Chinese economic growth starts to fall
China’s GDP growth has averaged close to 10% since 2002 and its global GDP ranking surpassed the UK, France, Germany and Japan to take the second place behind only the United States. China drove a major part of the global growth engine during the 2008 global financial crisis through its massive stimulus package. 
 
Numerous global corporations have opened up manufacturing or retail facilities in China in the past decade. Chinese citizens enjoyed unprecedented high employment rates and increased standards of living. GDP per capita measured in purchasing power terms more than tripled from USD2,800 in 2002 to a forecast USD9,100 in 2012, according to the International Monetary Fund. Millions of people escaped poverty and entered into the middle-income class. 
 
The new plan of Xi Jinping, the new head of the Communist Party of China, comes at critical moment for China.  
 
“Our party faces many severe challenges and there are many pressing problems within the party that need to be resolved, particularly corruption, being divorced from the people, going through formalities and ‘bureaucratism’,” acknowledges Xi. 
 
While China’s GDP increased nearly fivefold under Hu’s 10-year rule, this year the economy is expected to grow at its slowest pace since 1999, leading to calls for bolder reforms.
 
“[They] will be inclined to be risk-averse, whereas China’s conditions in the next five to 10 years will require risk-taking, otherwise the much-awaited economic restructuring cannot be implemented,” said Steve Tsang, an expert in Chinese politics at the University of Nottingham.
 
The export industry grew at 30% annually from 2002 to 2007 upon China’s entry into the World Trade Organisation.  But as China has grown to become the world’s largest exporter, with more than 10% of the global market, further drastic growth in export is unlikely. Rising wages and a stronger CNY also will diminish China’s export competitiveness. 
 
Xi’s plan to tackle the problems
Xi’s plan is to double China’s 2010 GDP and GNP level by 2020. This is only possible if Beijing were to maintain 7.5% GDP growth for the next 8 years. 
 
Xi pledged to address issues such as education, healthcare and environmental protection. Xi also has to engage in major economic reforms such as reducing size and influence of State Owned Enterprises (SOEs), freeing up capital markets and building up a welfare system. 
SOEs are still dominant in the commanding heights of the economy; their share of total output still remains high at 26%. This is despite the fact that the number of SOEs as a share of the total is only 5% in 2011, according to the Wall Street Journal. 
 
Maintaining growth levels above 7.5% does not seem easy either. Beijing has seen its GDP growth continuously fall since 2010's second-quarter. Main drivers of economic growth, such as investment and exports, are slowing down. Stimulating the economy through a larger monetary supply left Beijing to see enormous side effects such as increased inflation and non-performing loans. Both high inflation and non-performing loans can lead to social instability and cause a great threat to the Community Party if not handled properly.
 
 
Increasing the overall consumption level requires Beijing to resolve the income inequality issue. Beijing will need to set new policies to steer its economy towards higher value-added businesses rather than the current labour-intensive kinds. 
Five mega-trends that foreigners should understand
There is a long list of industries that can benefit from China’s major economic reform. As Beijing tries to narrow China’s income gap over the next decade, Chinese consumption levels will go up, and the yuan will appreciate against the USD. Foreign businesses can benefit from these five mega-trends: real-estate, natural resources, education, health care and tourism.
 
This column will focus on each topic in depth every month. This month is about overseas real-estate markets: 
 
Chinese buyers have been purchasing luxury properties across the US, Canada and Australia, and have injected billions of dollars into these countries’ residential-real-estate-markets. 
 
Dolly Lenz, a luxury-real-estate broker in New York, estimates that half of her clients now hail from China- more than twice the amount two years ago. Pamela Liebman, Chief Executive of the Corcoran Group, says that the shopping for luxury properties by China-based buyers has accelerated dramatically since the start of 2012 to record-breaking levels in a recent Wall Street Journal arficle.
 
With the struggling US real estate market, foreign investors started to take interest in the undervalued American real estate market. Especially in China, with their currency appreciating 7% against the US dollar since June 2010, the number of wealthy Chinese interested in purchasing US housing market assets has also increased. 
 
Meanwhile, in an effort to deflate China's housing bubble, Beijing has placed restrictions on multiple real-estate purchases and recently began to require more equity for mortgage loans, according to the Wall Street Journal.
 
The Canadian real-estate market has also enjoyed a surge of Chinese real estate buyers’ interest. 
 
“Vancouver has been a popular destination for the Chinese, driven in large part by its proximity to China and its spectacular feng shui,” notes Jamie MacDougal of Sotheby’s International Realty. Also playing a factor is the long-standing Canadian policy has offered citizenship to foreigners willing to make substantial investments, according to the Daily Beast. 
 
Allur Group, a Canadian real-estate company,  is one of the real estate companies that have benefited from the Chinese overseas real-estate buying frenzy. Allur recently launched an online showroom for new real estate developments. The company provides real-time information and content on Canada’s newest real estate.
 
“The biggest reason why the Chinese are so keen to invest their money internationally is diversification. A stunning 86% cited this as a major factor, while a following 76% said it was to have access to a wider range of investment products — as those accessible in China have become overused and overrun, ” says Simeon Garratt, Partner at Allur group.  
 
As part of diversification and securing wealth offshore in ‘safe-havens’, Chinese are looking for long-term security in the form of hard assets. 
 
Steven Loh, a businessman from Singapore who runs a real-estate advisory group called Silkrouteasia Capital Partners, is a bulk buyer. He recently purchased six apartments in Los Angeles's Ritz-Carlton Residences for about USD1 million each and is also facilitating a USD60 million transaction with several overseas investors to buy more than 50 condos in another Los Angeles development, according to the Wall Street Journal.
 
altBefore the property value rises, these individual or institutional buyers will want to get a jump-start on the market. The Chinese have a high propensity and love for acquiring good quality real estate. Mr. Loh believes that there is strong desire amongst Chinese high-net-worth individuals to allocate between “10-25% of their wealth to the US assets.”
 
Chinese investors interested in buying overseas real-estate will only increase in number and a lot of new business opportunities will be created accordingly. While Chinese investors have been primarily targeting major cities such as New York, Los Angeles and San Francisco, they are beginning to expand into cities in other parts of the US such as Florida, Seattle and Las Vegas. 
 
According to the Wall Street Journal, many are turning to Chinese media to market themselves—and their wares. Jing Chen, a broker for Corcoran in New York, writes a column in Mandarin for a popular Chinese website, Sinovision.net. Last year, she wrote a column about Harlem brownstones gaining in value; eight months later, she sold three of them to Chinese buyers, each for somewhere between USD1 million and USD2 million apiece.
 
“The Chinese are like Hollywood celebrities,” she says. “Once one Chinese person buys a brownstone, they all want one.”

 By Hyuk-tae Kwon

 









 

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