While it is commonly accepted that China’s runaway economy has to slow down to be sustainable, there is increasing concern that its current loss of steam masks a host of structural problems which may spell the beginning of the end of the so-called “China Dream”. The cover article of The Economist (27 July) shows a front-running China caught in the mud. An analysis of Thompson Reuters asks if China would follow Japan’s past slide into “economic coma”.
A July 2013 update on China's economy is provided by the UK's Foreign and Commonwealth Office publiation "China Economic Focus 2013".Download China Economic Focus_ July 2013
There are many questions amidst the uncertainty. First, could China slow down below the magic 7% growth threshold and yet avert disaster? Professor Michael Pettis of Peking University thinks what matters is not the overall growth rate but private consumption expansion and economic restructuring.Click here James O’Neill, former Chairman of Goldman Sachs Asset Management, opines that China’s decade ambition of 7.5% growth seems achievable after all. Click here Perhaps the real question to be asked is whether and how China can re-balance the economy from export and investment towards sufficient household consumption.
The answer may become a little clearer by examining the following data. According to China’s National Bureau of Statistics, from 2011 to the third quarter in 2012, consumption contributed to 55% of China’s growth with investment accounting for 48.8% and net exports, 4.3%. Click here A report of the Mckinsey Quarterly shows that urban consumers, those with $9,000 - $34,000 household income, have grown from 4% of urban population in 2000 to 68% in 2012. China is now the world’s largest e-commerce market, according to the McKinsey Global Institute Click here. The Brookings Institution expects China’s consuming middle-class to jump from 12% of population to 70% by 2030. Click here
In fact, over the past 20 years China has enjoyed by far the highest average growth rate in household consumption of any major economy. However, consumption remains barely over 35% of GDP in 2011, less than half of the share in the U.S. This paradox is due to the even faster growth of capital investment. China’s dynamic consumption growth is borne out by the fact that in 1990 China accounted for just 2.9% of total global household consumption, but by 2010 the share was 7.4%, ahead of the respective share of Germany, UK, France and Italy, according to a report of the Brussels Institute of Contemporary China Studies Click here.
The reality is that with wage hikes and better access to healthcare and other social provisions, China is witnessing momentous growth of a surging middle-class with rapidly rising discretionary income. This is happening in the largest and faster urbanization drive in human history, with third and fourth-tier cities in inner provinces taking the lead. More jobs and economic opportunities inland would help the critical hukou (household registration) reform needed to end the social and economic marginalization of some 240 million rural migrants by luring more of them back to their left-behind families.
The second and related question is whether with declining exports, China will be able to generate sufficient jobs to generate the rise in consumption. Although official unemployment rate stays around 4.1% for the last decade, this hides a mixture of huge layoffs in unskilled jobs, high unemployment amongst an annual supply of 6.9 million university graduates offset by a tight market in service jobs, a growing trend of having to hire older workers, and rapidly rising private-enterprise job opportunities in the inner provinces, according the Ministry of Health and Human Resources Click here. Although demand for labour in the second quarter this year declined by 2.8 % (167,000 jobs) compared with last year, there are still 107 jobs for every 100 job seekers, with western and central provinces more undersupplied than the eastern industrial heartland.
The third question is whether China will be able to transcend low-value-added production towards an economy built on innovation and proprietary technology. There is still a long way for China to populate the commanding heights of the world’s top brands. Only a few Chinese brands are making their mark globally. Nevertheless, according to the World Intellectual Property Organisation’s latest report, for the first time, China now tops the world in the filing of patents, trademarks and industrial designs.Click here The Royal Society shows that within this year, China is set to overtake the United States in the number of citations in scientific literature. Click here What is more, with massive financial resources, China is beginning to acquire some of the world’s top brands.
The fourth question is whether China will be able to reform its repressive financial system and state sector to achieve more efficient capital utilization. The reform of the financial and state-sector gravy train is perhaps the last hurdle jealously guarded by vested interests that holds back China towards advanced country status. The recent credit squeeze imposed by Beijing on local governments’ borrowing shenanigans and the abolition of the lending-rate floor for banks, albeit baby steps in themselves, are nevertheless a clarion call to arms. According to a World Bank report blueprint endorsed by the State Council’s Development Research Centre, state-owned-enterprise reform is at top of the agenda. Click here The early breakup of the mammoth Railways Ministry is a sign that vested interests are not unshakeable.
The fifth question is whether China will be stifled in pollution before the country achieves a higher-income economy. Out of sheer necessity, China is pushing rapidly ahead with a green strategy. In less than a decade, the country is leading in a number of renewable energies. According to the Chinese Academy of Sciences (*), fossil energy will drop from 92.7% of total energy demand to 80% by 2020 and 45% by 2050. Renewable energy is to rise from 6.7% to 16% and nuclear energy from 0.7% to 4% by 2020, thereafter to 45% and 10% respectively by 2050. Under the current Five Year Plan (2011-15), energy intensity per GDP input is to reduce by 16%, and CO2 emission by 17%. China seems to be on track with these self-imposed targets. In an age of resource scarcity and climate change, there seems no alternative to green development for a large country as China.
(*) Science and Technology in China: A Roadmap to 2050, Chinese Academy of Sciences, Science Press Beijing, Springer Heidelberg Dordrecht London New York, 2010, Table 3.1, p.42
The sixth question is whether China will be able to rid itself of corruption and improve its governance. There is now a raging nationwide campaign to fight corruption. Many senior heads are beginning to roll and the entire bureaucracy is being kept on its toes. The new leadership is trying to set an example of down-to-earth, no-nonsense, frugality and is holding party secretaries to account for people-based governance.
Last but not least, even if China can escape the middle-income trap, the question is whether China could become a more responsible stakeholder in the world order. China is the largest contributor of peace-keeping force amongst permanent members of the UN Security Council, chairs an anti-piracy coordination committee, plays a crucial role in the six-party talks on North Korea, and most recently hosted separate meetings in Beijing with Israeli leader Netanyahu and Palestinian leader Abbas. Commensurate with its rising status in the world. China is likely to embrace a greater role in the global commons.
In sum, to maintain sustainable growth and to overcome the middle-income trap, there are still many mountains to climb. China is already making a number of strides and the prognosis is largely positive. The pudding, nevertheless, remains to be tested.
