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Asia-Pacific cities in Tomorrow's World: The rise of China

Asia-Pacific cities in Tomorrow

In this week's Asia-Pacific cities research, Harry Tan, Head of Research, Asia-Pacific, explores the rapid development of China.

The world’s economic landscape and growth dynamic has changed drastically over the past two decades, and the rapid development of China is a key contributor towards the shift of economic power from West to East. Tomorrow’s World will see China continuing to play an increasing and critical role within the global economic and financial ecosystem. Although the Chinese economy has been slowing of late, the slowdown is policy-induced and has rebalanced the economy away from credit-driven investments into a greater share of consumption.

Furthermore, as China’s growth steps away from highly-elevated levels, the economy is still producing more output compared to three decades ago when growth was running at a much higher pace (Fig.1). China is already the world’s largest economy, at around US$19tn measured by purchasing power parity terms, having surpassed the US back in 2014 (Fig.2). The rise of China is indisputable, and we believe Chinese cities will form an increasingly integral part of a global real estate portfolio.

 

Fig.1: Slower growth but gaining global share

Source: Oxford Economics, 2017

 

Fig.2: Impressive growth performance

Source: Oxford Economics, 2017


The rise of China belies a positive structural story. According to the World Bank, over 600 million Chinese have been lifted from poverty in the past 30 years, while the infant mortality rate has fallen sharply (Fig.3). More than one billion Chinese, equivalent to 90% of the population, now use a mobile phone as their primary tool of communication. This is compared to 1980, when only 3% of Chinese households had a telephone.

 

Fig.3: More than an economic miracle

Source: Oxford Economics, 2017

 

Over the past 30 years, China’s urbanisation ratio rose from 19.4% in 1980, immediately after the country kicked off its reform and open-door policies to 55.5% in 2016. By 2030, it is estimated that around 70% of the population will be living in cities, implying approximately 300 million more urbanites in China, equivalent to the entire population of the US. This means an expansion of the services sector and higher wages should help to significantly boost household wealth and consumption (Fig.3 and Fig.4).

 

Fig.4: Rising urbanisation and income

Source: Oxford Economics, 2017

 

Fig.5: Massive wealth accumulation 

Source: Oxford Economics, 2017

 

There is an untapped demographic dividend in China based on quality, rather than the quantity, of labour. By 2030, China is projected to have at least 220 million college graduates, constituting about 27% of the labour force, similar to the level in Germany, France and the UK. At 109 million, China’s middle-class households outnumbered the US (at 95 million) in 2015 and it is expected that by 2025, another 130 million households will join this burgeoning class, opening up vast opportunities for future consumption growth. Consumer demand should continue to expand in the coming years, if mirroring the experiences of other regional economies over the past three decades (Fig.6).

 

Fig.6: More room to spend

t=year 
Source: Oxford Economics, 2017

 

It may be easy to dismiss but it is hard to ignore China for many reasons. China surpassed the US as the world’s largest trading nation in 2013, and last year, total trade equalled the US at around US$3.7tn. Chinese consumers are the biggest purchasers of luxury goods, accounting for 30% of the market ahead of the US and Europe. In 2016, 122 million Chinese travelled overseas, more than any other country.

Since 2010, Chinese development lending has exceeded the World Bank; loans to Latin American countries exceeded the combined amount from the World Bank and the Inter-American Development Bank. China is also the top holder of US treasuries. Many Chinese cities will rank among the top global cities in the coming years, underpinned by urbanisation, rising middle-class, and a wealth and growing services economy from improving productivity. Therefore, we believe it makes sense for global institutional investors to ride the secular rise of China and Chinese cities, and allocate favourably across the different real estate classes.

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