MARKET WATCH

MARKET WATCH

OPINION

A New Momentum of Growth

The financial crisis deriving from the United States in 2008 has not only trapped the global economy in a cycle of recession, but also greatly changed the structure of the global financial market. This change has also expanded to China.

China’s financial market has transformed from a traditionally bank-dominated one to a more diversified system. The proportion of bank financing against total financing has been greatly reduced, from more than 90 percent in 2003 to 58 percent in 2011. This has created a boom of various financing methods, such as entrust loans, trust loans and corporate bonds, and brought about a different banking system from Europe and the United States.

A diversified financing system can offer more convenience to small and medium-sized enterprises, but it puts China’s financial system in a more vulnerable situation. Corporate investment is facing opportunities as well as challenges. And the result of their investment depends on their own market judgment.

As a response to the 2008 financial crisis, the Chinese Government adopted expansionary credit policies, which hiked the money supply, credit increases and total financing in society to an unprecedented level. A huge sum of money flew out of the banking system, which has been the major momentum for fast economic growth during the past few years. It is also the reason for skyrocketing housing prices, putting the domestic financial market at unprecedented risk. The financial crisis also dealt a heavy blow to the export-oriented Chinese economy. The dwindling external demand is a main cause for the slowdown of China’s economic growth.

External demand can hardly be restored in the short run (five to seven years), the key to sustain economic growth lies in expanding domestic demand. China’s domestic consumption has a large gap from that in the United States. With a population of 300 million, the yearly consumption of the United States totals $11 trillion. In sharp contrast, China, with a larger population of 1.4 billion, only has $4 trillion in annual domestic consumption. China’s per-capita consumption is less than one 15th of the number in the United States. In other words, as long as the number in China increases to one 10th of that in the United States, the overall GDP will increase by more than 80 trillion yuan ($12.7 trillion). In addition, three imbalances exist in the Chinese economy: the imbalanced development between urban and rural areas, between big cities and small cities, and between east China’s coastal regions and central and western regions.

In a bid to expand domestic consumption, the country should roll out overall institutional reform, to enhance residents’ income, to narrow the income gap, and to adjust the above-mentioned imbalances. For instance, with production costs rising in coastal regions, it is becoming a trend to transfer industries from coastal regions to central and western regions, especially to the southern parts of those inland regions, which have a good natural environment and are most adjacent to coastal developed regions. Hence, those regions will probably be the frontier of a new round of industrial transfer and soon become a new growth point of the economy. Investors should keep a sharp eye on those regions by carefully observing business opportunities during the industrial transfer.

As is evident in the 12th Five-Year Plan (2011-15) for central and western regions, these economically lagging regions have a stronger desire for economic growth and are actively integrating their resources. This may not only create a positive environment for industrial transfer, but also fully exert their local resources. During this process they will need large-scale infrastructure construction and a batch of industries and companies. This will also form a new consumption momentum.

If the real estate bubble could be successfully squeezed from the Chinese economy, a new prime time would be created, leading to another decade of fast economic growth. Facing a brand new financial market, companies and individuals will have huge investment opportunities. Whether companies can properly grasp these opportunities will be the key to survival amid severe market competition.

THE MARKETS

Top Private Firms

China’s largest private steel enterprise Shagang Group ranked first in the 2012 list of the country’s top 500 non-state-owned enterprises, with business revenue of 207.5 billion yuan ($32.68 billion) in 2011, according to the annual survey recently released by the All-China Federation of Industry and Commerce.

Last year’s champion Huawei, a leading telecommunications equipment and technology solutions provider, took the second spot on the list, and home appliance retail chain Suning came in third.

The top 500 private companies posted average business revenues of 18.61 billion yuan ($2.95 billion) last year, up 33.25 percent year on year, and their average profits reached 877 million yuan ($139.2 million), registering a 12.17-percent increase. The total assets of the 500 enterprises reached 7.77 trillion yuan ($1.23 trillion).

There is still a regional imbalance among the top 500, with 380 enterprises on the list based in the country’s eastern regions, according to the survey.

Overseas Acquisition

Weichai Power, an automotive and equipment manufacturing firm under Shandong Heavy Industry Group (SHIG), on September 3 clinched a deal to buy a one-quarter stake in German forklift truck maker Kion Group.

The 738-million-euro ($923-million) deal was signed in Jinan, capital of east China’s Shandong Province, and marked the greatest direct investment in a German firm made by a Chinese company to date.

Under the deal, Weichai Power will invest 467 million euros ($584 million) to acquire a 25-percent stake in Kion Group, and another 271 million euros ($339 million) for a 70-percent majority stake in Kion’s hydraulics business.

Kion Group is the world’s second largest forklift truck maker and holds 15 percent of the global market share in the business. The purchase is expected to offer Kion debtrefinancing relief.

This is an edited excerpt of an article by Yi Xianrong, a research fellow at the Institute of Finance and Banking at the Chinese Academy of Social Sciences, published in Securities Daily