Three numbers for China

I was in Beijing earlier this month to attend the China Development Forum. This event is a great forum which brings together industry experts, economists and policymakers from around the world.
I also participated on a panel on "Prospects for China's Economic Growth over the next decade" with Lu Zhongyuan and Liu Shijin from the Development Research Center of the State Council, Stephen Roach, Nouriel Roubini, and Rio Tinto CEO Sam Walsh.
In my remarks I outlined some of the factors that will drive Chinese growth in future. Below you will find some key extracts from my address to the Forum.

Please let me know your thoughts.

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Over the past thirty years, the pace of development in China has been astonishing and unprecedented.
China's growth over the next ten years will likely be slower, but slower does not mean slow. No other large economy can come close to the growth China has today.
The Chinese consumer is now the most important in the world, and China will soon be the world's largest consumer market.
Urban per capita GDP will reach some 10,000 dollars per year within a decade.
China's population will also have a better safety net, encouraging them to save a little less and spend a little more.

Let me tell you the three numbers that I believe will influence China’s growth story over the next 10 years.

221.
7.5 million.
440 billion.

221 is the number of cities with over a million people by 2025. Urbanization will continue to create massive infrastructure and emerging middle-class demand.

7.5 million. This is the number of students graduating every year. These talented people are tomorrow’s wealth creators, something we at UBS welcome, being the largest wealth manager in the world.

440 billion. This is the amount in dollars Chinese consumers will spend online this year, making China the world’s largest e-commerce market. And this is expected to reach a trillion dollars within five years.
These numbers are a good indicator of China’s status as a nation with world-class technology, and of the progress made in rebalancing its economy.

You get the picture.
The fundamentals are great. But what else will help China grow?

Well, there are positive economic reforms designed to support growth.
These include:
- the deregulation of pricing in key areas like utilities and services;
- the continued growth of the private sector, including the ongoing reform of SOEs and the development of ‘mixed ownership’;
- and, last but not least, the acceleration of pension and health insurance reforms.

And the NPC made it clear earlier this month that this pace will be kept up.
Clearly, this growth has to be managed and funded in a sustainable way.

And China's leaders have been thoughtful and considered in the way they have sought to liberalize the country's financial sector.

This approach must be continued if sustainable growth is to be secured.
If we step back and think about first principles, then it is clear that financial intermediation – connecting sources of capital with users of capital in a productive and efficient way – is a precondition for optimal growth. And a key component of that is the development of deep and liquid capital markets.

Getting this right is important, and not only for China.

China’s policymakers have an inherent advantage. They can not only scrutinise global best practice, but also learn from the mistakes of others.

This allows them to make more informed choices about what will work best for China. For example, Europe is currently wrestling with an over-reliance on the banking sector. Around 75 per cent of all corporate financing in Europe is provided by banks, compared to 30 per cent in the US. Europe has therefore had to begin a difficult debate on capital market union. China has already made progress on this front.
Over the last 15 years, the proportion of formal bank lending in China's total credit system has declined from 90 per cent to around 70 per cent today.

On the other hand, the rise of the shadow banking system – which may help improve the efficiency of credit allocation in the long run – needs to be reined back.

This will allow regulatory checks-and-balances to be applied, and risk management systems to be established or enhanced. It's clear that having an efficient debt capital market is very important. Domestic bond issuance reached 2 trillion dollars last year, up 41 per cent on 2013. At the same time, China's international bond market is buoyant, with issuances last year reaching the equivalent of 139 billion dollars, more than half of the total in Asia.

In addition, in the last 20 years, the capitalization of the A-share market has increased over 200 times to 6 trillion dollars, making it the world’s second-largest equity market.

Derivatives markets will also be crucially important for China. The development of the futures market will play a vital role in hedging and risk management, ultimately creating a more efficient, less risky economy.
If capital markets are the bridge between sources and users of capital, China will need more bridges and more traffic across them. With 15 trillion dollars in bank deposits, growing at 2 trillion dollars a year, China can recycle savings into productive assets.
Financial reform is crucial to the healthy development of the Chinese economy in the longer term. Indeed, financial sector reform is a key component of China's economic reform blueprint, as unveiled at the Third Plenum in November 2013, and will give the market a more decisive role in allocating resources.

As a banker, I am naturally cautious.
I always look ahead to spot the bumps in the road.

But in the case of China, I believe that if the reform agenda is completed in full, the road ahead will be smooth. Ten years from now, China is likely to be the world’s leading economy, and it will enjoy more sustainable and better-balanced growth.