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By Jeremy Glaser and Daniel Rohr, CFA | 12-09-2013 02:00 PM

Health Care the Next Chapter of China's Growth Story

Consumption-led industries will drive Chinese growth for the next decade, and health-care spending, in particular, should outpace China's overall economy, says Morningstar's Dan Rohr.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Dan Rohr; he's an analyst here at Morningstar. He has been closely following China. We're going to get an update on China's growth prospects.

Dan, thanks for joining me today.

Dan Rohr: Thanks, Jeremy.

Glaser: In the past we've talked about some of the challenges that China is going to face in the coming years. But over the past couple of quarters at least, the past couple of months at least, the picture has looked a little bit brighter in China. Is this a sign that the worst is behind them, or is this more of a lull before the storm?

Rohr: We've certainly seen the headline macro indicators tick higher in China. That really kicked off I'd say in July, when we started to see things turn. If you take a look under the hood of some of those indicators, what concerns me and, I think, a lot of the more bearish folks on China is where a lot of the strength was most manifest, and that was on the infrastructure side of the economy, in real estate, things of that nature.

When folks are talking about a hard landing, or at least a deceleration in Chinese economic growth, what they're mainly concerned with is debt.

When you take a look at, say, total credit outstanding in the Chinese economy, that's been what folks have been keeping an eye on. And that's actually grown at double the pace of gross domestic product over the past three quarters, and I don't think we're quite out of the woods yet.

Glaser: The Chinese leadership just completed, relatively recently, its Third Plenum, the meeting where they set out some reforms. We're getting some details there. Do you think these reforms have a chance of making a big difference? What are some of that the major tenets of reform?

Rohr: It's worth pointing out that the document that came out of the Third Plenum was more of a set of broad guidelines, if you will, as opposed to any concrete steps that would be undertaken.

Now with that said, I do think that the vision articulated by that document, implicitly by president Xi Jinping and premier Li Keqiang, is generally favorable as it concerns China's outlook for the next decade to the extent it creates additional space for the market, as opposed to the state, to the extent it would conceivably target reforms that would put China on a more sustainable growth path, one driven by household consumption as opposed to ever more, say, infrastructure and luxury real estate.

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