Apr 29, 2014, 6:22 PM ETConference Presentation, Panel

China's Economic Outlook: The View from Asia

Panelists: The session features Dr. Ha Ji-Ming (Goldman Sachs Vice Chairman), Virginia Kamsky (Strategic Advisory Firm), and Huang Jing (Lee Kuan Yew School of Public Policy).
China's Transformation: The panel contrasts China's current status with the 1970s under Jimmy Carter, when basic goods like rice, oil, and cloth were government-rationed.
Hukou System: The discussion highlights the hukou (household registration) system, noting that immigrant laborers often lack registration, denying them access to education and healthcare; conversely, a Beijing hukou is a non-tradable asset of high value.
Upcoming Event: The Milken Institute's Asia Center in Singapore is organizing an Asia Summit in September.

Structural Slowdown: Dr. Ha Ji-Ming characterizes China's slowing growth not as a cyclical downturn but as a structural shift driven by demographics; the working-age population share peaked and began falling sharply in 2015.
Demographic Decline: China faces a sharper demographic contraction than 1990s Japan due to government intervention in birth rates, leading to shrinking labor supply and declining savings rates.
Investment-to-GDP Distortion: China's investment-to-GDP ratio exceeded 50% in the previous year, surpassing the peaks of Japan (40%) and Korea (40%) and exceeding China's own historical high of 42% during the 1958 Great Leap Forward.
Consumption Ratio Imbalance: Consumption as a share of GDP is approximately 33%, significantly lower than the 60-80% range typical for the US and emerging markets, necessitating a rebalancing away from investment.
Growth Target Revision: Dr. Ha projects a permanent decline in growth rates, suggesting China must accept a "Goodbye 8%, Welcome 6%" scenario to correct economic imbalances.
Policy-Driven Slowdown: Huang Jing argues the slowdown is a deliberate policy choice to transition from investment-driven growth, avoiding the chaos associated with market-driven recessions.
Vested Interest Resistance: Reforms face strong opposition from the "iron triangle" of state-owned enterprises (SOEs), local governments, and the financial sector.

Leadership Competence: Huang Jing cites three pillars of confidence in Chinese leadership: their bottom-up career progression through multiple provinces and ministries, the rigorous selection process among 82 million party members, and a thorough consultation process involving domestic and international experts.
Anti-Corruption Campaign: The anti-corruption drive serves as both a political tool to dismantle vested interests and a source of legitimacy as economic delivery slows.
Generational Dynamics: The campaign is driven partly by the current leadership (children of founding fathers) seeking to reclaim state resources allegedly "stolen" by management in the previous generation.
Timeline for Reform: Panelists estimate the anti-corruption campaign and necessary structural reforms will take 5 to 10 years to complete.
Priority Conflict: Dr. Ha warns that while reform is necessary for long-term stability, the leadership often prioritizes short-term stability to prevent social unrest, potentially allowing long-term bubbles to grow.

Property Bubble Risks: The panel identifies a massive real estate bubble, noting that in Shanghai, the monthly mortgage on a 90-square-meter apartment exceeds the average household income, indicating purchases are driven by investment rather than need.
Future Selling Pressure: With the one-child policy creating a generation of single children who now own multiple properties to fund their retirement, a surge in selling pressure is expected post-2015 as the elderly liquidate assets.
Policy Relaxation: The one-child policy has officially been relaxed in some cities, but Dr. Ha and Virginia Kamsky note that high housing costs, lack of social safety nets, and social conditioning make families unlikely to utilize the option for a second child.
One-Home Restriction: Government restrictions on buying multiple homes have inadvertently fueled overseas investment, such as in Australia and Canada, as families seek to park wealth.

Political Crisis: Environmental degradation (air, water, food) is viewed by the leadership as a primary catalyst for potential political revolution, similar to precedents in Japan, Taiwan, and South Korea during the 1980s.
Water Scarcity: China supports 20% of the global population with only 7% of the world's freshwater, and 30% of its land is considered desert.
Water Management: The "South-to-North Water Transfer Project" is underway but faces uncertain results in addressing the massive logistical challenge.
Pollution Statistics: Domestic data indicates 60% of monitored water areas are of unacceptable quality, and soil pollution affects 20% of arable land.
Food Safety: Widespread food contamination (e.g., tainted milk) has led Chinese parents to import infant formula, even from foreign-owned facilities in China, driving up food security risks.
Mitigation Strategy: The government plans to prioritize fixing pollution in the most impacted industries and metropolitan areas (Beijing, Shanghai) and is aggressively expanding renewable energy (wind, solar, liquid gas).

Outbound Investment Surge: Chinese outbound investment has shifted from raw materials to diversified sectors, including commercial real estate (e.g., HNA buying NH Group in Spain) and tourism (e.g., Club Med).
Cross-Border Threshold: For the first time in Q1 of the current year, Chinese investment in the US exceeded US investment in China.
Diversification Drivers: Chinese high-net-worth individuals are diversifying assets abroad due to slowing domestic asset appreciation, RMB depreciation, and the desire for international education and residency.
Regulatory Shifts: The US has relaxed barriers via CFIUS, evidenced by the approval of the Smithfield acquisition and increasing Disney interest, making the US market more accessible.
Valuation Gap: Chinese investors find US property cheaper than domestic equivalents; for instance, a $2M US apartment in DC includes significant land and free public schooling, whereas a comparable Chinese unit is five times more expensive with high international school fees.
Tax Structure Limitations: China's tax system relies heavily on regressive indirect taxes (VAT) rather than direct income taxes, hindering consumption growth; the panel notes administrative constraints prevent a rapid shift to direct taxation.
Food Security Abroad: To secure food supplies, China is acquiring agricultural land abroad (e.g., sovereign wealth funds in Kazakhstan) and buying foreign food production assets (e.g., Shuanghui buying Smithfield).

Shale Gas Delay: China is lagging in the shale revolution compared to the US, not due to lack of reserves, but due to technological gaps and high extraction costs that currently lack commercial viability.
Technology Dependence: While China possesses the necessary capital for energy projects, it relies on external technology, making its pace of development dependent on global momentum.