KEY POINTS:
The Chinese economy is soaring, with no sign of an imminent slowdown.
Gross domestic product (GDP) continues to grow at more than 10 per cent a year, the country has a huge trade surplus and international reserves, it is undergoing a construction boom, the political situation is remarkably stable and the sharemarket is booming again after the sharp correction six weeks ago.
China, particularly in Beijing (population 10.9 million) and Shanghai (12.6 million), resembles an enormous construction site. Old China is being razed and replaced by giant apartment blocks, office buildings and shopping malls. Only a select number of old and historic areas are being preserved, mainly to satisfy the buoyant domestic and foreign tourist trade.
The level of development is breathtaking. China is making up for nearly 40 years of low growth after the Communist Party came to power in 1949. A large number of spectacular office buildings are being built on the south side of the Huangpu River, Shanghai's new financial sector. At its current pace of development, Shanghai will make Hong Kong look like a small city in the not too distant future.
Beijing, which is somewhat less westernised than Shanghai, is being substantially redeveloped for next year's Olympics Games. The Olympics are an important symbolic event for China and Beijing is undergoing a huge transformation because of them.
China's spectacular economic growth will have to continue if all the new shopping malls, catering to a rapidly escalating appetite for European luxury goods, are to be viable in the long term.
The impressive level of development is clearly reflected in the country's economic performance (see table). Real GDP grew by 10.7 per cent last year, compared with 10 per cent or more in each of the three previous years.
Nevertheless China still has a long way to go before it catches up with the Western world, as GDP per capita was only US$2000 ($2723) last year compared with US$27,600 for NZ.
The economic growth is being driven by three major factors: buoyant domestic investment, strong domestic demand and a huge increase in exports.
Real gross fixed capital formation has grown by more than 18 per cent for five consecutive years. This reflects the huge investment in factories, roads and other infrastructure projects, apartment blocks, office building and shopping malls. Several economists are concerned that there may be over-investment in some areas but fixed capital formation is expected to grow by more than 15 per cent this year and next year.
The Beijing 2008 Olympics and Shanghai 2010 World Expo, which is a major event for China's largest urban area, will continue to boost expenditure on major projects.
Domestic demand is also soaring as consumers benefit from higher wages, more sophisticated borrowing facilities and low unemployment, particularly among the urban young and educated.
Consumer expenditure is giving a big boost to the domestic economy even though the Chinese have a high savings rate.
But the main catalyst for China's economic growth, and the principal reason for its testy relationship with the United States, is its booming export sector. A large number of Western companies, including Pumpkin Patch and Skellerup from New Zealand, are taking advantage of China's low-cost manufacturing facilities.
As a result China's trade surplus has surged from US$23-32 billion in 2000-2004 to US$102 billion in 2005 and US$177 billion last year. The trade surplus in the first quarter of this year was US$46.4 billion.
The United States has become particularly agitated as it had a US$233 billion trade deficit with China last year. So China operates a huge trade surplus with the US but a combined deficit with all its other trading partners.
The US Government is under immense pressure from domestic manufacturers to restrict Chinese imports and at the end of March it introduced a highly publicised 18.2 per cent average levy on glossy paper imported from China.
The US preaches free trade but is very quick to protect its domestic manufacturers when they face increased import competition.
Pumpkin Patch already faces duties on its Chinese-manufactured exports to the United States. These goods could face further import duties as apparel is the fifth-largest US import from China and has been growing more rapidly than any other item.
The US Administration is in an awkward position because China's current account surplus and international reserves are partly funding the large US current account deficit.
China's international reserves have grown from only US$168 billion in December 2000 to US$1202 billion at the end of last month and a forecast US$1500 billion by the end of 2008. The United States, and other current account deficit countries, have become increasingly reliant on China to fund their deficits, with the Chinese now holding an estimated US$350 billion of US Treasury securities.
If the US continues to levy duties on imports from China then the Chinese may sell down their North American investments. These two events could instigate a major trade war and have serious implications for the US dollar.
The Chinese Government did a remarkable job of keeping inflation in check and a lid on any asset price bubbles until the Shanghai sharemarket took off last year.
Average residential property prices have risen nearly 400 per cent since 1991 but housing affordability has risen because per capita net disposable income has grown at a faster rate than property prices.
The Government has played a major role in curtailing house price rises by discouraging foreign investment in the sector and encouraging the development of large apartment complexes.
The sharemarket was remarkably subdued until it took off last year with the benchmark Shanghai Composite Index surging 130 per cent. This year also started with a hiss and a roar with the index rising a further 13.7 per cent, to 3040.60, by February 26. The following day it plunged 8.8 per cent, sending shock waves around the world's sharemarkets.
But the downturn was short-lived and the surging sharemarket is one of the main topics of conversation in China again.
Travellers on domestic flights receive a free Chinese language newspaper devoted totally to the sharemarket that is avidly read by the mostly male passengers.
The market has risen every day in April, on record turnover, and the Shanghai Composite Index closed on Thursday at 3531.03, 16.1 per cent above its precorrection high on February 26.
Shanghai analysts and business people told the Weekend Herald that the market was irrational. The best-performing stocks were the ones mentioned in the Chinese language newspapers and Westerners would be best advised to avoid investing in the Shanghai market.
The best advice for New Zealanders wanting an exposure to the booming Chinese economy is to invest in Western companies that export to, or operate in, the world's most populous country.
Several Australian companies, which have a favourable tax treatment under New Zealand's new investment tax regime, fit this criteria.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management. bgaynor@milfordasset.com
