THE CHINA SEVEN: The Huge Megatrends That Will Define China's Next Decade

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Photo: Getty Images / Feng Li

For nearly two decades, we’ve counted on China to be the perpetual growth machine that would power the world’s economy.But as many have observed, that era is slowly coming to an end.

Jefferies recently published a massive 426-page report that boils down what we can expect in this next phase of China’s development.

CLICK HERE TO SEE THE PRESENTATION >

Here’s a portion of the bank’s summary of the presentation, called “Jeffries China 2025: A Clear Path to Prosperity”:

Academics have already pointed out that China has hit ‘a Lewis turning point’ (China has run out of cheap labour) and/or growth will eventually slow since the economy has ‘less catch-up left’ as technological limits are appearing (Solow Growth Model).

Equally, China will need to begin developing its own technology rather than importing innovation. This can be costly and far more difficult to achieve success. It is very difficult for a country to invest over 50% of its GDP productively … [And] demographics will begin to work against the economy as the 15 to 24 cohort falls by 20% over the same period.

Jefferies asked its top China analysts to come up with “megatrends” that will define the Middle Kingdom.

They came up with seven: urbanization, consumerization, slowing trade, slowing
fixed asset investment, financial reform, information mobility and service sector development.

We have summarized their projections here.

Megatrend 1: China is entering a new demographic phase.

Source: Jefferies China 2025: A Clear Path to Prosperity

Source: Jefferies China 2025: A Clear Path to Prosperity

DEMOGRAPHICS: As a result, China will end its one-child policy.

Source: Jefferies China 2025: A Clear Path to Prosperity

DEMOGRAPHICS: By 2025, two-thirds of China's citizens will live in cities.

Source: Jefferies China 2025: A Clear Path to Prosperity

Megatrend 2: China's ravenous consumption will slow.

Source: Jefferies China 2025: A Clear Path to Prosperity

CONSUMPTION: Rapid consumer expansion will halt for most sectors as China's economy matures.

Source: Jefferies China 2025: A Clear Path to Prosperity

CONSUMPTION: However, consumption for luxury goods will stay strong.

Source: Jefferies China 2025: A Clear Path to Prosperity

CONSUMPTION: Northwestern regions will see much faster growth due to quick urbanization and large-scale exploration of mining resources.

Source: Jefferies China 2025: A Clear Path to Prosperity

Megatrend 4: China's trade surplus will disappear.

Source: Jefferies China 2025: A Clear Path to Prosperity

TRADE: By 2023, China will actually see a trade deficit as its exports become less cost-competitive.

Source: Jefferies China 2025: A Clear Path to Prosperity

TRADE: Its lack of globally recognised brands will cap China's share of global exports at 10 per cent.

Source: Jefferies China 2025: A Clear Path to Prosperity

TRADE: China will almost certainly become more reliant on oil imports as travel increases.

Source: Jefferies China 2025: A Clear Path to Prosperity

INVESTMENT: Fixed asset investment will slow.

Source: Jefferies China 2025: A Clear Path to Prosperity

INVESTMENT: The government already has difficulty identifying worthy new infrastructure mega projects.

Source: Jefferies China 2025: A Clear Path to Prosperity

INVESTMENT: In manufacturing, falling corporate profits and cash flows have put a drag on capex growth.

Source: Jefferies China 2025: A Clear Path to Prosperity

INVESTMENT: All told, investment growth will fall to 6.6 per cent per year during 2011-15, down from the 13.3 per cent it was during 2001-2010. For 2021-25, investment growth will be just 4.8 per cent per year.

Source: Jefferies China 2025: A Clear Path to Prosperity

Megatrend 5: China's maturing economy will force financial reforms.

Source: Jefferies China 2025: A Clear Path to Prosperity

FINANCE: Interest rates will be fully liberalized and market-based.

Source: Jefferies China 2025: A Clear Path to Prosperity

FINANCE: But exchange rates will remain partially controlled.

Source: Jefferies China 2025: A Clear Path to Prosperity

FINANCE: Capital markets — via banks, brokers and insurers — will play a more significant role in financing China's economy.

Source: Jefferies China 2025: A Clear Path to Prosperity

FINANCE: The offshore renminbi pool is likely to be significantly larger, especially in key global financial centres like London.

Source: Jefferies China 2025: A Clear Path to Prosperity

FINANCE: There will also be new revenue streams as insurance, pensions and derivatives grow.

Source: Jefferies China 2025: A Clear Path to Prosperity

Megatrend 6: Chinese consumers will max out on mobile.

Source: Jefferies China 2025: A Clear Path to Prosperity

WIRED: By 2025, 82 per cent of Chinese will be on the Internet, compared to about 75 per cent of Americans.

Source: Jefferies China 2025: A Clear Path to Prosperity

WIRED: The majority (more than 90 per cent) of Internet users will be mobile Internet users after 2014.

Source: Jefferies China 2025: A Clear Path to Prosperity

WIRED: The e-Commerce market will grow to RMB12trn or 17 per cent of total retail sales by 2025.

Source: Jefferies China 2025: A Clear Path to Prosperity

WIRED: Online ad revenue will grow at a CAGR of 30 per cent during 2011-2016 and 13 per cent during 2016-2025.

Source: Jefferies China 2025: A Clear Path to Prosperity

Megatrend VII: The service economy is coming.

Source: Jefferies China 2025: A Clear Path to Prosperity

SERVICES: China will need to begin developing its own technology rather than importing innovation. But this will be a difficult and costly transition.

Source: Jefferies China 2025: A Clear Path to Prosperity

SERVICES: Authorities will move away from financial repression and liberalize returns on domestic deposits.

Source: Jefferies China 2025: A Clear Path to Prosperity

China in 2025

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