Qian Liu remembers what it was like to be a Chinese PhD student in Uppsala, Sweden’s fourth-largest city, located 70km from the capital, Stockholm. Compared with Beijing, which is teeming with 20 million people, Uppsala has barely more 140,000 people. The Beijing native, who speaks fluent English and Swedish, found the fifth-largest country in Europe a fairly closed place but says her four-year experience there has helped her become a better watcher of the Chinese economy.

Liu is deputy director of China forecasting and senior econometrician with the Economist Intelligence Unit (EIU) in Beijing and the group’s main China number cruncher. In a recent interview with The Edge Singapore, she says concerns about China’s economy are grossly exaggerated. While she concedes that demand for Chinese exports to recession-hit Europe and growth-challenged US are weakening, she believes stronger income growth in China will help boost private consumption, and that will keep the economy chugging along nicely.

Moreover, she says Beijing is likely to loosen credit policies and enact new fiscal stimulus measures to support economic growth later this year, though she says the scale of the stimulus will be fairly small compared with what China saw three years ago. Earlier this year, Beijing revised its GDP target for the year to 7.5%. “Ignore that number,” says Liu, firmly tapping on the table. “Historically, there has been very little correlation between the government’s target and what China really achieves.”

The one question that Liu is asked several times a day is whether the Chinese economy is heading for a hard landing. Indeed, she says, sometimes the same question is asked repeatedly in convoluted ways. Her stock response: “Based on current data, there is no chance of a hard landing in the foreseeable future.” She says strong recent data supports her view that China’s economy will avoid a hard landing this year. “If you really insist that I use the word ‘landing’ when I talk about the Chinese economy, I will say we will see a ‘soft landing’,” she says.

Tight credit policies helped cool China’s real economic growth to 9.2% last year, and EIU projects the economy will expand 8.3% this year. “We expect the economy to grow slightly faster, or 8.5%, next year as external demand starts to improve,” she says. EIU forecasts that GDP growth will slow to an average of 8.1% a year between 2013 and 2016. “The government wants a more sustainable growth level, but the economy isn’t slowing as much as it wants it to slow,” she says.

Growing demand from emerging markets
Don’t bet on a recession in Europe derailing China’s growth story just yet, even though Europe, if taken as a single entity, is China’s largest trading partner. Liu says that, while China remains a global manufacturing and export powerhouse, its reliance on exports to develop­ed markets and on manufacturing has been declining. And even though China is affected by the slowdown in orders, particularly from recession-hit Europe this year, there is strong growth in demand from emerging markets, she says.

“Don’t forget that Chinese companies are selling goods to Latin America and Southeast Asian markets such as Indonesia, where demand is still fairly robust,” she says.

Liu is looking at 8% to 9% growth in exports this year. That is not bad, given the global macro environment and demand slump in Europe, she notes. Indeed, it is way better than the 30% fall in exports seen in the aftermath of the Lehman Brothers collapse in late 2008, when trade finance completely dried up. “While exports are still 30% of China’s GDP, what’s driving growth is investments, and a lot of the new investments are actually going into areas that are catering to domestic demand or are related to services,” Liu says.

A key sector to watch is small and medium-sized enterprises that are either suppliers or feed off the larger manufacturing sector. SMEs are the biggest employers in China and also by far the fastest-growing part of the economy. “If the SME sector starts to slow, there could be social instability, and that’s a much bigger concern for Chinese policymakers than monthly export growth numbers or manufacturing PMI or whatever,” says Liu.

Yet, she concedes, some of the SMEs have been hit hard because of a slowdown in export orders. “The government is looking at providing SMEs that have been hurt from manufacturing slowdown subsidies or help, which should cushion the impact.”

Overall, growth in 2013 is likely to be slightly higher, as this year’s moves to relax policies further boost investments, she notes. A rapid rate of job creation and rising wages, EIU predicts, should ensure stronger growth in private consumption, while the ongoing development of social services will support increases in state expenditure. As domestic demand expands, import growth will continue to outpace export growth, helping further rebalance the economy.

What is going to drive growth in China over the medium term, since China cannot just keep growing its export-led manufacturing sector? Aside from global recovery, the key driver is likely to be investments, says Liu. That is investment in new sectors, which will help rebalance the economy from being manufacturing-based and export-led to one that is more domestic consumption-based and services-led.

“The story in China now is really more about rebalancing than what sort of landing the economy might have.” China will overtake Japan to become the world’s second-largest consumer market by 2020, behind only the US, with domestic consumption in China topping US$7 trillion (RM21.6 trillion) by the end of this decade.

Key to next growth phase
Liu also cites the way China’s manufacturing is climbing up the value chain, from labour-intensive to high-value-added machinery and heavy-construction equipment. “Not only is there a lot of local demand for such machinery because of all the property and infrastructure projects, but China is also now exporting this heavy equipment to India, Indonesia and other emerging markets,” she says.

Emerging markets that are trying to imitate China’s spectacular growth story are the ones that need such equipment most, and Beijing is happily leveraging on its own recent boom to help these emerging economies with affordable equipment that is attractively priced against comparable stuff made in the US, Japan or Europe.

But it will be consumption and a local spending spree that will be the real key to the next phase of China’s growth, says Liu. While Western economists are still focused on the bursting of China’s real estate bubble in large cities such as Shanghai, Beijing and Shenzhen, she says: “How the property market does will dictate how well the economy performs over the next two or three years.”

But isn’t there a housing glut in China and isn’t the government trying to nip the property bubble in the bud? “Yes and no,” she says. “While there is clearly a glut in some large cities and in certain segments of the market and the government wants to curb speculation in areas in which the market has run ahead of itself, demand for housing overall in China is still outstripping supply. That means housing needs to be built, and how fast it is built will help determine how fast the economy grows.”

Aren’t there enough ghost malls and ghost towns in China with too many buildings and too few occupants? Liu says Western media has exaggerated the development of one ghost city in inner Mongolia.

“While there are a few ghost malls, most of the malls I go to have so many people that you’d be jealous that you are not in the mall business,” she says. “To understand the demand for property, you need to look at wealth creation in China, average wage growth as well as demographic factors.

“Average wage growth has been around 20% over the last five years and, at EIU, we expect 9.5% average annual wage growth in China for the next eight years or till end-2020.” Wages in China doubled over the last four years and will probably double again over the next eight years or so, she notes.

Liu tells her own story about how she has been house-hunting in Beijing for more than a year. “There was this place that I really wanted to buy,” she says.  “By the time I got there a few days later, the place was gone.” She has heard similar stories from friends and relatives. “Demand is such that, if you don’t snap up a good place, the chances are it will be sold out if you wait another day or two.”

She has no doubt that, in the short term, there will be a correction in some areas, particularly in some of the larger cities. “But people in China now have money, and they want to own a home, a roof over their heads and there are no other avenues for investments other than the stock market, which is even riskier than the property market in China.”

Some economists have called China’s econo­my and the Shanghai stock market the canary in the global coalmine. Ahead of the 2008 global financial crisis, Chinese economy had started to slow a bit and Shanghai market had begun correcting. Moreover, months before the March 2009 trough in global equities, the Shanghai market had started to recover strongly, which in turn boosted the Baltic Dry Index and eventually helped put a floor on negative sentiment worldwide. Are the numbers in China telling us anything about what we might see globally? Yes, says Liu, they are indicators that the global recovery will gather pace towards year-end.

Still, she concedes that, despite her generally optimistic outlook, there is a risk that China could suffer a sharp slowdown in growth in the next five years. If the housing market in large cities becomes frothy and excessively high levels of investments continue, they are more likely to morph into sources of turbulence. Liu says her experience in Europe has taught her that nothing should be taken for granted; as such, Chinese policymakers should remain ever vigilant. — The Edge Singapore

This article appeared in The Edge Financial Daily, May 16, 2012.