A Chinese take on the Goldilocks story
By Glenn Maguire (China Daily)Updated: 2007-06-20 11:19
The author Glenn Maguire is Asia-Pacific chief economist with Societe Generale Corporate & Investment Banking
In the Western fable, Goldilocks was a young girl who went venturing into the woods where she discovered a family of bears. Exploring the house the bears lived in, she found that the furniture and food of Mother and Father Bear did not suit her, however that of Baby Bear was different. It was perfect for Goldilocks.
The story concludes with Goldilocks attempting to eat the bears' breakfast porridge. Father Bear's porridge was "too hot" for Goldilocks whereas Mother Bear's porridge was "too cold". However Baby Bear's porridge was "just right".
As such, the notion of Goldilocks has entered the financial markets vernacular as a shorthand way of expressing a notion of an economy or asset market that is neither growing too fast, nor too slow. A Goldilocks economy is one that is growing just right.
Given the words "China" and "overheating" almost always appear next to each other in newspaper headlines these days, let us consider whether China is in fact a Goldilocks economy.
China has posted double-digit growth for more than five years now. Looking forward, we see no fundamental change in China's macro story. Fixed asset investment (FAI) has cooled, slowing from 30 percent growth at the end of 2005 to 14 percent at the end of 2006. We believe that this will be the low point for FAI growth and anticipate it to stabilize at around 20 to 25 percent annually, consistent with China's enormous urbanization goals.
Growth is now more likely than not to reaccelerate into 2008 in the lead-up to the Olympic Games, with a more pronounced drift below a 10 percent pace not likely until 2009. We believe growth could peak as high as 11 percent in 2008.
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The government has had more success in cooling investment than it has in boosting household spending. There remain strong income disparities across urban and rural China and the measures to boost spending will take some time to have an effect.
Massive investment aimed at expanding the productive capacity of the economy has been the key driver of China's above 10 percent growth coexisting with low inflation over the past five years. Though policymakers are concerned about the sustainability of this investment-led growth model, it is likely that the investment to GDP ratio will rise further in coming years. It is likely to exceed 45 percent in 2007 and could potentially reach as high as 50 percent by the end of 2010.
When, and at what level, this ratio peaks will largely depend on
policymakers' attempts to boost consumption. With a savings ratio above 50
percent, there is little room for investment to fall in the absence of
strengthening domestic consumption.
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