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Urbanization a Key to Consumption

    June 04, 2010

Urban populations are growing in Asia and may hold the key to the region’s future economic growth. The global urban population is expected to grow by 1.6 billion people by 2025, 40 percent of that coming from China and India alone.

By 2025, China’s urban population is expected to be three times that of the U.S. and India’s is expected to be double.

This urban growth is important because it will be the region’s catalyst for economic growth. This chart from the McKinsey Global Institute (MGI) shows that GDP per capita growth in urban areas is expected to outpace that of rural areas over the next 15 years.

McKinsey Urban Vs. Rural 060310

One reason for this is that urban jobs tend to pay more. In 2008, the average per capita income in China was 254 percent higher if you lived in an urban area versus a rural one, according to Morgan Stanley.

More pay leads to more discretionary spending. MGI estimates that the number of Indian households with discretionary spending could jump from just 13 million in 2005 to 89 million households by 2025. MGI says discretionary spending will account for 70 of consumption growth.

We’ve already seen how the urban migration affects China's overall consumption, which in urbanized eastern provinces is roughly 33 percent higher than in rural western provinces. As urban centers grow in western China, consumption levels for materials, goods and services should rise.

 

Chart of the Week: China Exports

    May 18, 2010

The government in Beijing has been aggressive in using money policy to damp down property speculation as a way to steer China’s hot economy away from a meltdown.

CHI - Policies 051410Avoiding dangerous bubbles makes long-term sense, but there have been short-term costs:  the benchmark Shanghai Composite Index is down more than 20 percent year-to-date. It fell 5 percent on Monday alone.

The chart to the right shows the growth rate over the past eight years for China’s imports and exports (lines), along with the nation’s trade balance (vertical bars). After a huge contraction in 2008-09 during the global recession, both imports and exports have bounced back strongly.

In April, imports (which include raw materials for manufacturing) were up 51 percent year over year and exports were up 30 percent.

Four straight months of strong year-over-year recovery in China’s exports was likely a key factor considered by the government when it imposed anti-property speculation policies last month.

But the sovereign debt crisis in the eurozone is another key factor. Europe is China’s largest trading partner, and the debt crisis has led to a significant devaluation of the euro against the Chinese yuan.

The yuan, which is pegged to the U.S. dollar, is up 14 percent against the euro in just the past four months. The stronger yuan makes Chinese-made products more expensive in the eurozone, and this hurts exporters.

The three-month trend of China’s imports, a leading indicator of future exports, has already headed down. Should a meaningful export deceleration occur in the intermediate term, Chinese authorities may reverse policies to protect economic growth.

To get more insights and perspective from the U.S. Global Investors investment team, subscribe to our weekly Investor Alert.

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

 

 

India’s Urban Future

    May 12, 2010

McKinsey Global Institute (MGI) believes India is on the verge of the second-greatest urban migration the world has ever seen. In their new report India’s Urban Awakening, MGI says India’s urban population could balloon to 590 million—nearly twice the size of the United States—by 2030.

MGI says India will have “68 cities with populations of more than 1 million, 13 cities with more than 4 million people and 6 megacities with populations of 10 million or more.”

India's Future In Its Cities 051210

MGI says the Indian economy is expected to be five times greater by 2030, with urban centers being the key driver of this growth. It projects India’s labor force to increase by 270 million—70 percent of that coming from urban jobs.

This new labor force will also be relatively young compared to other BRIC countries. The median age for the Indian population is 25.3 years—lower than Brazil (28.6 years) and well below China (34.1 years) and Russia (38.4).

In order to meet the needs of this urban class, MGI estimates India will need:

  • $1.2 trillion in capital investment
  • 2.5 billion square meters of roads to be paved
  • 700-900 million square meters of commercial and residential space
  • 7,400 kilometers of subways and transportation to be constructed

To put these figures into perspective, the investment amount needed is about one-third of India’s total GDP in 2009. And if 700-900 million square meters of real estate sounds like a lot, that’s because it is. India would need to build a city the size of Chicago every year for the next 20 years in order to create enough commercial/residential space.

While these numbers are staggering, perhaps the most important figure for commodity demand is MGI’s projections on the growth of India’s middle class. MGI estimates that India will have 91 million middle class households by 2030, that’s more than a 300 percent increase from the 22 million they have today.

As we’ve said many times before, the growth of the middle class in the developing world, especially in Asia, is a key driver of demand for oil, steel, copper, cement and countless other resources because the wealthier these people are, the more they will consume.

This mass of people will likely demand better housing, better roads, better goods— in all, a higher quality of life than what’s been available to them in the past. The resulting pressure this could have on commodity demand is the X-factor that we believe makes this cycle different than anything we’ve experienced in the past.

You can download the full report at McKinsey's Web site.

By clicking the link above, you will be directed to McKinsey’s website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. BRIC refers to the emerging market countries Brazil, Russia, India and China.

 

Where China Buys Oil

    May 06, 2010

China is thirsty for oil and has a fat wallet.

Just last month, China signed a $20 billion deal with Venezuela to finance more exploration and production in the country’s Orinoco Belt. It’s a win-win deal – Venezuela badly needs the capital to restore its depleting fields and China badly needs the resource.

Counting this one, since 2005 China has made 27 international deals worth more than $60 billion involving 19 countries and every continent but Antarctica. The graphic below shows who China is dealing with and how much oil it is getting for its money.

China's Sources of Oil 050610

China’s demand for oil already exceeds its domestic production, and the country’s rapid growth will only widen that gap. Over the past 20 years, China’s oil consumption has jumped more than 5 million barrels a day while production has only increased by a little more than 1 million.

This strong demand will likely withstand any economic slowdown. More than 1.2 million passenger cars were sold in China in March, up 63 percent from the previous year. The country is currently on pace to sell 14 million autos in 2010, which would be tops in the world for a second straight year.

The brisk pace of vehicle growth in China should ensure that the pace of oil deals also remains brisk.

 

Chart of the Week – Indonesia’s Good Position

    May 04, 2010

Indonesia’s favorable demographics, natural resources and relatively stable political environment have set up the country for what could be a very strong decade of growth.

Indonesia’s economy doubled in the past five years and GDP growth was faster than that of India, China and Brazil. In greater Jakarta—the world’s second-largest urban area with roughly 23 million people—GDP per capita grew by 11 percent each year from 2006 through 2009.

Indonesia Labor Cost 043010More importantly, this growth was driven by the private sector, not by government spending – the private sector accounts for roughly 90 percent of the country’s GDP. In addition, commodities account for only 10 percent of economic growth, which insulates the country from the volatility in commodity prices.

Indonesia’s strength is in its consumers. Over the past five years, the average income has doubled to $2,350 a year and Deutsche Bank thinks that can figure can reach $3,400 by 2011.

Despite this income growth, Indonesia still has the lowest unit labor costs in the Asia-Pacific region (chart), according to JP Morgan, and this has driven manufacturing activities from China into Indonesia.

A Deutsche Bank survey of 50 companies showed a 5 percent jump in employment over the past year. Low wages should help continue Indonesia’s industrial recovery.

Employment growth is key because half of Indonesia’s population is 25 years old or younger. Indonesia’s workforce as a portion of total population will rise over the next 20 years, and this should increase the country’s consumption levels and fuel further economic growth.

To get more insights and perspective from the U.S. Global Investors investment team, subscribe to our weekly Investor Alert.

 

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