What’s in store for China in 2012?

Despite food price inflation and a stagnant housing market,  
China should maintain a rapid rate of growth.


Gordon Orr, a director in McKinsey’s Shanghai office, offers a forecast for growth in China
this year. Read his ten predictions, then let us know what you think.

1. Government policies will spur consumption and investment. These
moves will compensate for declining exports and a slumping housing market. To boost
consumption, policy makers could pull a number of short-term levers, including tax breaks
and rebates, and are likely to raise the minimum wage further. The 12th five-year plan
calls for raising household disposable income by 7 percent a year; thus the government
may urge large state-owned enterprises to increase wages across the board, which would
pressure other companies to follow suit. Policy makers are also likely to extend a popular
program offering rebates on purchases of electronics and appliances. (It fueled the sale
of 200 million units, generating 450 billion renminbi—about $71 billion—in revenues
from 2009 to 2011.) In addition, the government will invest heavily in manufacturing,
particularly in the central and western regions, offering incentives to attract industrial
companies inland. The manufacturing sector will continue to fuel China’s growth, thanks
in part to the lower cost of labor and the improving infrastructure in the country’s interior.

2. Dominant models will emerge for reforming rural land ownership. China
must consolidate its farms to increase agricultural output and reduce the income gap
between rural and urban populations. Land reform could help it achieve these and other
objectives, and regions across the country are testing different pilots to identify the best
approaches. One in the city of Chongqing, for example, helps farmers move to cities and
thus gain access to education, health care, and pensions, which may be unavailable in
rural areas. Participants have the option of keeping or giving up their land use rights in
the process. A pilot in Chengdu, aiming to bring jobs and development to the countryside,
gives rural populations rights typical of those urban residents enjoy. Thanks in part to this
initiative, more than 90 percent of Chengdu’s rural residents now have medical insurance.

3. Real estate will stagnate. In an effort to further cool prices, the authorities
will maintain purchase and credit restrictions that contributed to the deterioration of
property markets in the second half of 2011. According to the China Index Academy, local-government revenues fell as a result of declining land sales—by 13 percent in Shanghai,  
14 percent in Beijing, and 29 percent in Nanjing from January to November 2011,
compared with the same period in 2010. Fear of local-government defaults and a general
property rout may induce the central authorities to ease restrictions. Nonetheless, Beijing
will continue to prioritize the construction of affordable housing for the poor in an attempt
to prevent a hard landing in the construction sector.

4. The fundamentals will cause further inflation in food prices. Broader
inflation in consumer prices appears to have peaked, but those of food rose at twice the
rate of the consumer price index in the closing months of 2011. Inflation is highest for meats—the price of pork and beef rose by 27 and 14 percent, respectively, over the 
12 months ending in November 2011, compared with the same period in 2010. The
trend reflects changing consumption patterns among urban consumers and the growing
middle class, who eat more meat, thereby increasing demand for cereals to feed animals.
The availability of food imports is limited, and the rate of productivity improvement in
domestic agriculture remains low. Moreover, price volatility is high, since even minor
disruptions can affect supply dramatically.

5. Chinese investment in green tech will spike upward. Thanks to
manufacturing at scale, China is already well established as a leader in the solar and wind
industries. In 2012, the country will expand its efforts to deliver products and services
directly to end users in international markets, raising barriers to entry for others. It will
also boost investment in manufacturing and other upstream segments of the value chain,
perhaps by acquiring (or striking partnerships with) struggling Japanese firms to gain
access to intellectual property. As green-tech matures, the government may let subsidy
programs lapse to prevent unmanageable growth and oversupply. Investors are interested.
In 2011, 28 of the world’s 51 clean-tech IPOs came out of China.

6. Accounting scandals will continue.  China’s reputation among regulators and
investors was tarnished in 2011. According to the  Financial Times, the total value of
Chinese companies delisted from US exchanges exceeded what Chinese companies raised
through IPOs in the United States last year. The trend will probably continue in 2012, since
more than 400 “reverse merger” companies are still listed in the United States; the fact
that they were not subjected to the rigors of the typical IPO process suggests that markets
are in for more surprises. International investors will become increasingly selective about
purchasing shares of Chinese companies.

7. Private-equity and venture capital funds may go ‘walkabout.’ Some venture
capital and many private-equity funds in China used an aggressive short-term strategy
that essentially involved buying companies shortly before they went public and then
listing them at high multiples. But as asset prices decline and the stock market drifts,
the potential for quick, IPO-driven returns falls greatly. If the assets these funds hold
were marked to market, a significant portion would be out of the money. Some funds will
probably get into trouble with impatient investors, raising the possibility that certain fund
managers may walk away from investments.

8. Chinese acquirers will be bolder.  As prices drop, Chinese companies will
seek international buying opportunities. A recent example is Shandong Heavy Industry
Group’s recently announced acquisition of Ferretti Group, the Italian luxury yacht builder.
Companies in some countries seem wary of the trend. Indeed, a South Korean consortium
may be assembling to preempt Chinese companies from acquiring a French firm that has critical technology for liquefied-natural-gas tankers. The Chinese will continue to purchase
property in the United States, but opportunities to acquire businesses there will be scant
in 2012, an election year.

9. The automobile segment will be slow. The auto market will probably grow
by around 8 percent, much slower than the 32 percent jump in 2010 but higher than
last year’s 2.5 percent. In particular, the market for small cars and microvans will grow
significantly in 2012, although the budget segment (cars that cost less than $10,000) will
become a key battleground between multinational joint ventures and local companies. 
The National Development and Reform Commission has required joint ventures to develop
and sell vehicles under “indigenous” (that is, local) brands, and most offer budget models
under them. This development puts joint ventures in head-to-head competition with
domestic automobile producers, such as BYD, Chery, and Geely. Meanwhile, several local
Chinese producers suffer from declining share. Stagnant real-estate prices will dampen
demand for luxury cars, and the debate about how aggressively to encourage electric
models has led to some adjustments in policy—such as a push behind range-extended
electric vehicles—that might at last help to ignite the market. One certainty is that local
companies are not ready to commercialize electric-battery vehicles at scale in 2012.

10. Hospital reform will accelerate.  Two developments will drive the reform of
hospitals. First, the emergence of clearer policies governing the payment mechanism
between payers and providers will dramatically reduce excessive levels of prescriptions
for expensive drugs. Second, local and overseas funds will lead a wave of hospital
privatization, including both existing and new assets. In the pharmaceutical and medical-device segments, new provincial tendering policies will further erode prices. Nimble locals
will fare best in this climate; multinationals will wait and see.


1. `、!3,`!E9C将出台一系列政策刺激国内消费与投资。这一趋势将弥补出口下滑和房地产市场降温。
2. 农村土地所有制的改革将会进一步提高农产品生产力,降低城乡差距。农村土地改革将有助于中国达到该目标。
3. 房地产将进入寒冬,当局将继续实行房地产限购政策和房地产信贷控制政策。
4. 食品价格不断攀升,导致持续不断的通货膨胀。食品价格波动幅度大,在很大程度上影响到供应。
5. 提高绿色环保技术的投资。2012年中国将更多地致力于在国际市场上向最终消费者直接提供产品和服务,提高进入该领域的门槛。
6. 还会继续爆发财务丑闻,并且该趋势在2012年还会持续下去。
7. PE和VC基金经理将会突然消失,私募基金和风险基金可能徘徊不前。
8. 中国企业将更大胆地进行对外收购。在价格下跌的情况下,中国公司将在国际市场上寻求更多的收购机会。
9. 汽车行业发展将放缓。中国汽车市场增长2012年可能为8%左右,低于2010年的32%,但是高于2011年的2.5%。
10. `、!3,`!E9C将加速医疗改革。

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