Asia Summit: China’s miraculous growth era is over

Lombard Street Research told more than 300 delegates at the PERE Summit: Asia today how China’s real GDP growth should be forecasted to be just 5 percent over the next 10 years. The stat turned out to be one of Day One’s major talking points.

China’s real GDP growth is expected to average just half the 10 percent annual growth rate of the past decade over the next 10 years, delegates at the PERE Summit: Asia heard today.The forecast was met with a mix of trepidation and doubt from various delegates, although it became a talking point on the conference’s sidelines throughout the day.

According to Diana Choyleva, director at Lombard Street Research, heightened financial turbulence in China is set to fundamentally change investor’s perceptions of the country. She told the more than 300 delegates how the reduced growth forecast would come directly as a result of China’s policymakers seeking to curb inflation, adding that slower inflation would create a “thin property market’ with fewer transactions, making it hard to determine prices.

Choyleva said: “There was no way they could curb inflation pressures without bringing real GDP growth well below trend. It was already well below trend in Q4 (2011) even though official numbers might tell you otherwise.” She blamed China’s excessive dependence on growth from exports, excessive saving by its people and mis-priced state capital as among the reasons for why China has found itself having to curb its inflation.

She said: “China’s investment rate in 2004 was 43 percent of GDP in 2004. That not only was sustained, but it actually increased to 49 percent in 2010. What has changed to prevent us saying in six years it will have grown to 55 percent?”

Choyleva said the “export shock” stemming from less demand from traditional trading partners has undermined the country’s excessive investments in its own infrastructure. “China has realised it must move to consumption but must realise it will involve slower growth.”

Coupled with that, China’s excessive liquidity from its stimulus measures had forced residential real estate prices to grow unsustainably. “China’s real estate benefited but it couldn’t get rid of the excess of liquidity and so passed money around in its system until prices of assets went up.” She also said that direct controls over China’s housing market had seen a freeze in transactions in its major cities and so conditions deteriorated last year. “Now Beijing can only curve inflation by having growth well below trend which is a good thing.”

The fallout for property, however, would not lead to a property crash, she said, as most people in the country were lowly leveraged – averaging 40 percent loan to value in 2009 and 50 percent loan to value in 2010 with the rest financed by household savings.