Business, Economics and Jobs

What does the 'world's best China strategist' say about the place now?


The "much-hyped" consumer-led growth model for China is developing more rapidly as the service industry slowly replaces factories and exports.


Wang Zhao

Editor’s note: The author is the editor-in-chief of the business channel at China’s People’s Daily.

BEIJING, China — One of the biggest economic stories right now is the continuing struggle of the world's biggest growth story of the last decade. China's GDP has slowed to 7.5 percent in the second quarter, marking the 11th slowdown out of the past 13 quarters.

However, the slowdown comes at a time when China is transitioning its economic model, diminishing its reliance on manufacturing for export and government investment in core industries while boosting domestic consumption as a new driver of the economy.

In a time of global recession, will a cooling China continue to power the world economy? What new investment opportunities will emerge from China's much-anticipated economic reform?

As the managing director and chairman of global markets, China at J.P. Morgan, Jing Ulrich is especially qualified to comment on China's economic and investing matters.

Ulrich is regarded as one of the most prominent advisors to some of the world's largest asset management companies, sovereign wealth funds and multinational corporations. She was included in Fortune's 50 Most Powerful Global Businesswomen and Forbes' 100 Most Powerful Women in the World.

She has frequently been voted by global institutional investors as the best China strategist. Her insight directly affects trillions of dollars of assets every year. Her expertise and sources have made her an important figure shaping the international community's approach toward investing in the world's largest and most dynamic developing economy.

Ulrich recently sat down and had an in-depth conversation in Beijing with Zhenyu Li, editor-in-chief of the business channel at the People's Daily, a Chinese government publication.

Interpreting the complex economic issues in a conversational manner, the "Oprah Winfrey of the investment world" shed light on China's economic slowdown, its transition to a consumer-driven economy, the under-the-radar investment opportunities in China, the country's current financial reform and other engaging topics.

Here are excerpts from their conversation, edited and condensed by GlobalPost.

Zhenyu Li: As you know, China has long been the growth engine of the global economy. But the country's GDP growth has been slowing down, which has garnered a lot of attention recently. There are both bullish and bearish views on China's economic outlook.

I know you are known for your candid and accurate assessment of China's economic conditions and trends. So, what is your take on the cooling Chinese economy?

Jing Ulrich: China's economic performance has indeed been closely watched by global investors, because it's the biggest growthstory in the world. Right now, everyone is focused on China's economic data and its growth potential.

I think there's no need to overreact to the slowdown of the Chinese economy. China has been deliberately slowing down the economy to maintain a more sustainable level of growth. Although China's growth rate has been in decline over the last few quarters, it grew 7.5 percent in the second quarter, which is still within expectations. We expect the country's economy will grow 7.4 percent in the third quarter, just a little bit slower than the second quarter. For 2014, we expect GDP growth of 7.2 percent.

Although recent economic data have shown deceleration in growth, we believe the long-term picture for the Chinese economy will be positive. The growth rate should come down in a gradual way and expand at a stable and healthy pace for years to come. The risks of a hard landing in China are small.

Zhenyu Li: How do you see China's role as a global economic powerhouse? Compared with China's double-digit growth in the past decade, China's current economic figures have caused some concern among other economies and global investors. How do you see China's GDP growth rate?

Jing Ulrich: Well, although China's current GDP growth is lower than before the financial crisis, it's still quite high compared to developed markets such as the US and Europe. China's GDP growth is still the fastest among major economies.

At its current stage of development, decades of double-digit growth have become unsustainable for China. It is not only the rate of growth that matters, but also the quality of growth. The current growth rate is slower, but more sustainable over the medium and long term. Such a trend would help sustain growth in Asia and the world.

The world should get used to China's slower pace of GDP growth. The slowdown is paving way for a series of reforms that will put the Chinese economy on a healthier and more sustainable footing. With a successful transition, China will still be a major growth engine for the global economy for many years to come.

Zhenyu Li: Talking about the economic transition, as you know, it's high on the agenda of China's new leadership, and the global business community has been keeping a close eye on it. You also said recently that global investors look forward to the acceleration of China's economic reform. Why do you think it matters so much?

Jing Ulrich: Because China's current export-led, investment-driven model of growth is unsustainable in the long run, transforming the growth model is vital for the nation's long-term development. The pace of reforms and rebalancing efforts are also critical for the global economy because of the important role China plays.

For global investors, China's economic transition, if implemented successfully, can offer them far better opportunities. Investors can expect to see a different kind of growth in China, based on market-driven pricing and consumption-led demand, as the government implements new reforms. By gradually opening China's capital account, foreign investors will be able to gain access to a wider range of investment options with exposure to potentially the world's largest consumer market.

Zhenyu Li: Speaking of China's long-term growth, in a time of economic transition, what do you think will be the new growth engine of China's economy?

Jing Ulrich: I predict that in the next five to 10 years, service industries will replace heavy industries and investment to become the brightest spot for China's economic growth. China can no longer depend on credit to stimulate growth, especially in heavy industries where inefficient use of capital has led to overcapacity in many sectors. China is moving toward a sustainable growth model that relies more on domestic consumption and as wages and standards of living increase, so will the demand for services.

Zhenyu Li: I am a little confused about the much-hyped consumption-led growth model. The majority of media outlets claim that China's current economic model is running out of steam, and the nation should move away from the current investment-driven model to a new one that relies on domestic consumption. The question is, don't you think consumption is an outcome of economic growth, not a reason for it? I mean a family cannot get rich by consuming. Do you think China, at the current development stage, could get rich by consuming?

To make it simple, do you think consumption could become a key driver of China's long-term economic growth?

Jing Ulrich: I believe so. In the past many years, China's economic model has been very reliant on exports and investment, but that year is over. China now has an economy that is already the second-largest in the world. China needs to really transition itself to more of a consumption-driven economy.

But there are some preconditions that need to be met. Chinese citizens save almost a third of their income, which is very high by global standards. A lot of them save because China's social safety net is not well developed in areas such as education and pension services. The development of a more comprehensive social safety net, with increased funding to the National Social Security Fund, and higher confidence in the public pension system may help shift China's household consumption behavior and bring the household saving rate closer to developed country norms (2 to 13 percent).

So, I think China's central government can really improve social services which would be a very big boost for domestic consumption.

The other issue is urbanization. China's urbanization rate is about 52 percent, which means over half of the population already resides in the cities. This also means that a large proportion of the remaining rural population could be moving to the cities in the coming 10 years, 20 years. This will become a very important driver for consumption as well.

As people move from the countryside to the cities, their income tends to grow quite rapidly. In fact, if you look at the income level of people living in the cities versus the countryside, it is about three to four times higher. So, I also believe urbanization could become a very important driver for China's domestic consumption.

However, this transition cannot happen overnight. It will take several years for China to transition itself to more of a consumption-driven economy.

In the second part of this series, the "Oprah Winfrey of the investment world" reveals the under-the-radar investment opportunities in China and some promising stocks in the A-share market, as well as sharing her exclusive insights on the much-anticipated financial reform in the world's largest developing economy.