China's transition: Risks and opportunities for S-E Asia

THE substantial devaluation of the renminbi against the US dollar and the tumbling Chinese stock markets have renewed global concerns that the Chinese economic miracle is coming to an end. Is this really the case, and what does it mean for South-east Asia?

What got lost in the recent focus on the currency devaluation was a much more revealing number - the fall in fixed investment. Investment contributed over half of China's growth over the last decade, but it is currently growing at its slowest pace since 2000. China's economic system is built on a presumption of rapid growth and large investment opportunities. Large businesses in China, many of which are state-owned, have access to large pools of savings at low rates.

Between 2001 and 2011, the Chinese government capped the official lending rate at around 7.1 per cent while Chinese nominal gross domestic product (GDP) averaged 18.6 per cent. Given that average investment returns in an economy track nominal GDP growth, a Chinese investor could borrow funds to invest in a project that did no better than average and earn double-digit net returns.