InterviewVIDEO - China is slowing but still strong, says consultant

06 March 2012 11:48  [Source: ICIS news]

By Elaine Burridge and Andy Brice

LONDON (ICIS)--China remains the dominant region for the chemical sector but with growth slowing the government is raising efforts to ensure a soft landing, a senior industry consultant said on Tuesday.

After years of unparalleled growth, Asia’s manufacturing behemoth has seen GDP slide back to single digit levels and its cost advantage shrink, thanks in part to a more demanding workforce.

With China now in its 12th five-year plan, which runs from 2011-2015, the government is becoming more selective in its development projects, said Alexander Keller, a partner at Roland Berger Strategy Consultants.

According to Keller, the Chinese government is intelligently mastering the economy. There is still enough funding available to provide a reasonable subsidy policy for social infrastructure projects and fiscal revenues are very solid, he said.

“The Chinese economy has been quite strong over the last few years and what we expect is a soft landing, which means that annual growth rates will come down to approx 8%,” said Keller. “But we see that the Chinese government has actions as well as financial resources in place to manage a soft landing in a reasonable and structured way.”

Currently, GDP in China is around 8% - in line with its long-term plans.

Keller pointed out that some 35% of private consumption makes up China’s GDP, compared with the Asian average of 50%. In addition, gross fixed investment is 40% of GDP, which he says is “ridiculously high”. This, he suggests, should be closer to 25-30%.

The major change we will see in China is an ageing population, he said. By 2050, almost a third of the 1.2bn population – 400m people – will be aged 60 years or more, meaning that every two workers will have to provide social security for a senior citizen. This will have several repercussions: income levels will increase and work will become more expensive. China has seen a 70% increase in salaries over the last 10 years, added Keller.

As a result, the health and education sectors will thrive in the coming years and become core industries.

From an investment perspective, growth will be more selective in the future, said Keller, with more attention paid to small- and medium-sized enterprises (SMEs) and less on the larger projects.

“I think there are a number of challenges the Chinese chemical industry has to face. One is that the industry structure needs to change. We are currently seeing a large number of small, entrepreneurial companies and we see a limited number of huge strong conglomerates. What we are missing in China is a medium-sized enterprise structure, which is about to develop. I think this will be a major challenge.”

For all its growth, China still needs European and US markets to sustain its development. Keller therefore warned that should Europe enter another recession, China’s domestic market would not be able to compensate.

“Definitely for the next 10 years, exports to Europe and the US will play a major role in the overall business planning for the Chinese government,” he says.

“There is no way China can run its economy without export markets; exports are the real cherries on the cake.”

By: Elaine Burridge
+44 20 8652 3214

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