China’s second round of urbanization is likely to be one its best new growth engines during the next decade, Citi believes.
Oscar Choi and Marco Sze of Citi point out that further urbanization will likely play a central role in exploiting the opportunities for rebalancing China’s economy and sustaining the next stage of growth.
Secret behind China’s past growth
Citi analysts point out that China’s economic transformation in the past was largely driven by robust exports and aggressive fixed asset investment. China joining the WTO in 2000 catalyzed globalization of its manufacturing base.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
The Citi analysts believe 2000-2010 was the golden period for China’s manufacturing and export businesses, pushing China to the number 1 spot in the global exporter league. During the period of 1980 to 2012, China recorded net exports of around $2.2 trillion, which enhanced China’s forex reserves to over $3 trillion, also making it to the number 1 position globally.
Further analyzing the key reasons for China’s export boom during 2000-2012 and FAI prosperity in 2000-2012, Citi analysts conclude the “China Development Model” is all about money supply, all about investment and all about land.
The analysts point out that China’s export boom between 2000 and 2012 was driven by cheap land, cheap and high quality labor and the opportunity offered by WTO entry.
It’s all about land
Citi analysts feel the most powerful propellers of China’s infrastructure and property investment in 2000-2012 was its land-driven fiscal revenues and land-driven financing. To sustain high economic growth, China’s central government and local governments have been aggressively investing in infrastructure and industries.
According to the Citi analysts’ estimates, the local governments derived 40 to 50% of their direct income through property-related tax revenues and land sales proceeds. This is evident from the following graph:
Local governments borrowed around RMB 10 trillion with land as collateral. The Citi analysts point out that in China, land is not only a kind of commodity but also a kind of quasi-currency, as the local governments, enterprises and individuals can leverage on land owned for financing, so as to enhance their overall financing capability.
Interestingly, Citi analysts also point out in that China, land requisition is a local government’s proprietary right, protected by law. In the general public interest, local governments can compulsorily confiscate land from the public, though compensation needs to be paid to those who are dispossessed. However, Citi estimates compensation for land requisition is equivalent to at most 25% of its market value. Thus with rapid urbanization in China in the past 15 years, land values have appreciated significantly, though it doesn’t benefit farmers who are disposed of their land.
Next round of urbanization
Oscar Choi and Marco Sze of Citi believe further urbanization is likely to be one of the best new growth engines for China’s economy in 2013-2023. The analysts think that by redistributing resources, urbanization can help optimize the balance between investment and consumption.
Citi analysts contend that converting the ‘quasi-urbanization’ in existing urban cities to ‘real urbanization’ would be the best way to seize the next round urbanization opportunity.
Citi analysts point out that the market seems to be anticipating a comprehensive reform package to be announced during the Third Plenary Session of the 18th Communist Party of China Central Committee scheduled to be held in 9-12 November.