Tag Archives: Credit Suisse

China’s Growing Good Fortune

Decades of rapid growth have, self-evidently, made Chinese richer. Over the course of this millennium alone, the average net worth of a Chinese adult has risen from $5,672 to $22,230, according to the new edition of Credit Suisse’s Global Wealth Report. Even allowing for the appreciation of the yuan against the dollar over that time, that represents robust growth in real wealth.

After a year in which they collectively acquired $1.4 trillion of new wealth, second only to the U.S.’s $8 trillion gain, Chinese now account for 9.2% of the world’s wealth, Credit Suisse reckons (vs China’s 11.25% share of global GDP). That is the third largest share after the U.S. and Japan. France would come next with 5.9%.

The distribution of that wealth is more even than in other large economies. Fewer than six in ten Chinese adults now have a net worth of less than $10,000, the report says. For India, the corresponding ratio is 94%. The world average is just shy of 70%.

Millions have been lifted out of poverty, and up to the next rung. Almost two out of five Chinese adults have a net worth of $10,000-$100,000, compared to a world average of one in five. Above that level, China falls dramatically below the world averages; just 2.5% of Chinese adults have a net worth in excess of $100,000, but the size of the population makes the raw numbers large. China has more than 1 million dollar millionaires, Credit Suisse reckons. It also has more ultra-high net worth individuals (residents with a fortune of more than $50 million) , at 5,830, than any country except the U.S., though the U.S. has nearly eight times as many.

Credit Suisse also notes that wealth inequality in China “has been rising strongly, however, with the increasing wealth of successful entrepreneurs, professionals and investors”. An anecdotal indication of that is that China had just one known billionaire at the turn of the century, and now has more than 60.

Though the pace of wealth creation in China has slowed with the slowing of the economy, Credit Suisse expects China to be a significant driver of wealth acquisition over the next five years. The bank forecasts that global wealth will grow by 40% over that time, with China alone accounting for one-seventh of that growth, largely driven by the growing wealth of the middle classes, which now account for more than one third of the global middle-class, and particularly if the economy is successfully rebalanced towards domestic consumption.

China could account for 58% of the middle tier by 2018, Credit Suisse says. If those forecasts come good, that would leave Chinese accounting for 10.2% of global wealth by then. On a per adult basis, wealth would increase by $12,100 to $34,400 and the number of millionaires double to 2.1 million. Chinese adults have “a very high chance” of moving up at least one wealth tier over the next 30 years, and “a very small probability” of dropping down one, Credit Suisse concludes.

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After China’s Gilded Age, A Different Progressive Era

Much of the commentary on Credit Suisse’s recent research note on China in 2015 has latched onto the comparison it draws between China’s economic development over the past 30 years and that of late 19th century America, the Gilded Age: massive and fast industrialization and rising incomes and income inequality with their attendant social problems. Scratch deeper and you will also find parallels in corruption, food and product safety and the emergence of large powerful industrial groups.

The policy lessons are dependent, of course, on what comes next. In the U.S., the laissez-faire of the Gilded Age gave way to the regulating Progressive Era in which government involvement in business and wealth redistribution increased markedly. As the FT’s Lex notes, America’s public finances deteriorated equally markedly, never to recover.

China already has close government involvement in business and closing the wealth gap between rural poor and urban rich was a priority for the Hu-Wen leadership as it will be for its successors. Corruption is, as always, being tackled. China’s equivalent of the robber barrons, or at least the least-well connected ones, are being brought to book; the state-owned combines, if not exactly being trustbust, are at least being reined in. Maybe China is just concatenating its versions of what were two distinct eras in the U.S. Or maybe one can only take historical analogies so far.

Beijing’s policy priority is restructuring the economy so the country can pass through the Great Wall, the per capita income levels at which fast-growing emerging economies tend to stop growing without institutional change. That has social implications, especially income redistribution and the provision of more social services, which are front and center of the new 5-year plan, and some political risks to the Party in a growing middle class that expects the provision of both. But it is largely economic driven in its policy dimensions.

In short, if Credit Suisse’s analysts are right, China’s Gilded Age is being followed by an economic Progressive Era rather than the socially-cast one that the U.S. created. Thus the risks to China are largely economic. What Credit Suisse’s analysts say could go wrong is that:

1) the key coastal provinces in China are unable to achieve the productivity gain or generate enough domestic demand after the migration of low-end labour intensive industries to inland provinces;

2) government(s) at different levels are unable to adjust to their new role, [i.e. to spend more money in providing social services and less in infrastructure and industrial investment,] and change the pattern of government financing in face of new demand; and

3) monetary policy and the financial sectors are unable to ensure monetary and price stability.

One popped property bubble and China’s public finances could look as ugly as any in the West.

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