China’s Transition Marks a new Reality for Emerging Markets (HSBC Global Asset Management)

September 2014



Binqi Liu and Olga Yangol

  • HSBC Global Asset Management


The defi ning feature of the Chinese economy has been its dependence on investment

spending and export-led growth. Last year the investment to GDP ratio in China reached

almost 50%, a record not only for China, but also for any other major economy. As China’s

investment level has reached unprecedented levels, the profi tability of investment projects

has been declining and price pressures are emerging in the labor market. Recognizing the

need to change the economy’s growth model, the Chinese government has been introducing

measures to reduce the economy’s reliance on investment and increase consumption. Such

efforts include raising the minimum wage, interest rate liberalization reform and building a

social safety net. Many investors have asked if the saturation in the level of investment and

the reforms aimed at restructuring the economy might bring an end to China’s growth, and

with that, the miracle of the Emerging Markets.

In response, we argue that the urbanization trend in China will help smooth the transition

of the economy from a largely investment to a more consumption-led growth. While recent

woes in the property sector in China have further fueled fears about a collapse in investment

and growth, in our view, the more likely outcome is stabilization in investment, accompanied

by a gradual rise of consumption in China.