Issue: 496
Sent: 26-09-2012 14:49:32
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Shanghai Faces Future as Consumer SocietyThe Essential SMSF Guide 2012-13APRA's new data collection standard and the latest attack by the Trade Unions to push for changes to Self Managed Super FundsEmail Marketing For Planners
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Shanghai Faces Future as Consumer Society

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

The transition of Shanghai from construction site to shopping mecca symbolises much of what is happening to China and, at the same time, Australia's challenge in engaging commercially with the country.

In the mid 1990s, Shanghai was a construction site. On one of my first visits to the city, an official of the development authority responsible for relocating the centre of Shanghai's commercial life to the east of the Huangpu River proudly advised that two thirds of the world's construction cranes were located in his city. Last week, I could scan the skyline without seeing a single crane.

More than two million people have migrated to Pudong over the past 10 years from other parts of China to boost the total number living in an area that had been largely farmland a dozen years ago to five million. Today, Shanghai as a whole has a population slightly larger than that of Australia. There is a mighty city, modern, bustling, crowded and in no obvious sense connected with a communist history. But no cranes.

For every crane that dotted the skyline in 1997, there is now a shopping mall or perhaps several shopping malls.

To the extent the pace of Chinese economic growth becomes dominated by how much its people can consume, personal income growth will become its primary determinant.

Income growth in China has been growing strongly. The Chinese government has a policy of raising the minimum wage by at least 13% a year during the current five year plan. Other incomes will grow more slowly so it would be hard to see anything but mid size single digit growth rates in the future.

Of course, Shanghai may not be currently typical of the whole. The largest cities were at the forefront of economic liberalisation. Hundreds of smaller (but not small) cities have some way to go to catch up and that is where the economic action is currently migrating.

China has a far more obvious two tier economy than Australia. Sharply slowing growth in the major cities accompanies double digit growth rates among the smaller cities still trying to get their share of development.

That combination suggests that the investment component of the Chinese economy is not going to collapse precipitously. However, as each city proceeds through its development phase, investment spending is likely to fall and the rate of personal income growth will play an increasingly important role.

This poses a longer term problem for Chinese policy makers. As labour costs continue to rise, inflation will loom as a larger macroeconomic problem or profit margins will contract. Policy will have to become more constraining. China will also risk losing its competitiveness unless it can take the next leap forward from an economy relying on its abundant labour as a source of demand and rapidly growing output to one driven by technological innovation.

Whether Australian companies will be able to take advantage of this multi-paced economic environment is unclear. So far, Australia's economic ties have been dominated by the dramatic rise in China's raw material needs. Its capacity to connect in a more nuanced manner in the future is unproven.

Former Treasury Secretary Ken Henry is supposed to be preparing some guideposts for how Australian business will be able to connect most effectively with China in the future.

At one level, it seems absurd that a lifetime bureaucrat has the task of telling lifetime business people how to do this. It would be an extraordinarily poor reflection on Australia's business leaders if he is able to show them directions and opportunities they had not perceived from their own understanding of the commercial positioning of their businesses.

Nonetheless, the test for Henry and the government on whose behalf he is working will be how effectively they are able to eschew outmoded generalisations about the makeup of the Chinese economy in favour of a view of what China is beginning to look like already - an increasingly diverse mix of markets within a framework of an economy whose raw material intensity is probably going to decline.

Australia will be attempting to engage with this increasingly unwieldy giant just as its comparative advantage is set to diminish.

That is not to say that its traditional role of raw material supplier will become irrelevant. With the share of investment in total GDP as high as it is, the make-up of growth still supports an important role for Australia's miners.

However, growth rates are set to be far more modest than the 15% a year growth rate in Chinese steel production, for example, experienced over the past decade. Something approaching 3% seems far more likely in even buoyant global market conditions.

Chinese Premier Wen Jiabao seemed to be at pains in his recent speech to the World Economic Forum gathering at Tianjin to emphasise the distinction between the strength of growth over recent years, on the one hand, and a future of "steady and robust" growth.

His speech reviewing the Chinese macroeconomic policy settings in the past year was notable for what western politicians might refer to irreverently as spin. He sought to reposition expectations about growth prosects by giving "greater priority to stabilising growth".

His speech was also noteworthy for its stark similarity to speeches by any other finance minister or government leader describing the progress in fine tuning a large economy. This is yet another sign that China is quickly becoming one of the many countries fighting headwinds from slowing global demand and a shortage of policy tools capable of delivering anything different.

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