China's economy is more likely to expand at 6-7% over the coming decade than at the near double-digit pace of the past decade, proving both bulls and bears wrong.
The current debate on China’s future has just two camps: the extremely bullish majority and a very shrill, bearish minority. The truth though probably lies in the middle. China could well be like Japan in the early 1970s, when the latter began to move to a lower growth trajectory but remained a compelling growth story for nearly two more decades.
It is increasingly apparent that the top Chinese leadership is accepting the notion that economic growth needs to slow down now for the economy to avoid a hard landing later. The latest annual session of the National People’s Congress (NPC) has just approved the 12th five-year plan, in which the GDP growth target has been set for 7%. Premier Wen Jiabao described Chinese growth as “unstable, unbalanced and unsustainable” three years ago, and its features have only become more precarious since.
In a remarkable achievement, Chinese policymakers have ensured that growth has stayed above 8% on an annual basis for 12 straight years. They appeared to have eliminated the business cycle by unleashing a seemingly never-ending investment boom that drove the investment share of GDP up from 35% to almost 50% — an unprecedented level in any nation. China is now spending more on capital projects than the far larger economies of the US and Europe.
China bulls, who believe the economy can keep growing at 8-9% for the foreseeable future, respond that Beijing can switch from investing in the export-oriented economy to building a domestic consumption-led economy where consumer spending replaces investment as the key growth driver. But this ignores the fact that China’s consumer spending has been rising at a breakneck speed of over 8% for many years, which is comparable with the growth seen in Japan and South Korea during their boom.
While it is true that Chinese consumption, currently less than 40% of GDP, is much lower than the 55-60% in other Asian countries when they were at a similar stage of development, the problem is over investment and not so much low consumption. China’s investment rate over the past decade accelerated to an annual rate of more than 25%, up from its trend of 20% over the preceding two decades, taking investment as a share of GDP as a result to the current level of almost 50%. Investment growth has to ease whereas consumption cannot feasibly accelerate much further, and that implies China’s overall growth is set to downshift.
China’s changing demographics also point to a more moderate growth profile. The heretofore surge of rural workers to more advanced better-paid jobs in cities is slowing. China is closing in on what is known in development economics as the Lewis turning point, when surplus labour from rural farming areas has been largely used up. This is the result of both heavy migration to cities over the last two decades and tight enforcement of the one-child policy that has shrunk the size of the workforce. Only 5 million people in the 35-54 age group will join China’s core labour force this decade, versus 90 million in the previous decade.
The shrinking workforce is the key reason why China is seeing structural inflation for the first time in decades. The minimum wage in China rose at 18% annually in the five years preceding the 2008-09 downturn, during which minimum wage increments were suspended. The unusually high average increment of 23% in 2010 was mostly to offset the one-year suspension. Although it is too early to ascertain a national average, announcements made so far in nine provinces suggest an average year-on-year minimum wage increase of 21.1% (to RMB1,079 per month), ahead of the observed compound annual growth rate from 2005-09. As part of the new five-year plan, the NPC has just decreed that minimum wages will rise by least 13% on an annual basis over the next five years.
China’s goldilocks era of supercharged growth with low inflation seems to be coming to a close. That will mean a more balanced domestic economy but also implies that low-end, high-growth manufacturing will increasingly migrate to cheaper parts of Asia and Africa with China’s inflation rising at a faster pace. The latest Chinese consumer price index readings have been around 5%, despite the prevalence of many administered price caps.
The worst case of inflation is in the property market that has given birth to a house-flipping culture that makes US’ recent mania seem rational by comparison. This craze was manufactured by Beijing’s policymakers. To maintain the growth targets in the wake of the global financial crisis, Beijing ordered banks to open the tap on loans so wide that in the two years following the global financial crisis, China’s new credit creation amounted to a staggering $2.7 trillion that equals more than 4% of global GDP and matches the size of the US credit expansion during the 2003-07 boom. At around $10 trillion, broad money in circulation in China now is more than the $8 trillion cash going around in the US economy.
Much of that money found its way into real estate. The 800 million sq ft of real estate sold in China last year was more than the sales in the rest of the world combined. Property prices in premier cities doubled during 2003-08, then jumped by another 40% in 2009 and 2010, making houses increasingly unaffordable for the vast majority. Research shows that relative to local-area economy, home values in Beijing and Shanghai are in the same ballpark as what was seen in Japan at its peak in 1990.
Outsiders who think Chinese leaders care only about fast growth miss the growing concern in policy circles about the rise in labour strikes, anger over inflation and the potential threat to social stability. The Chinese are ironically far more open and honest about the growth challenges they face than outsiders. One good indicator of this phenomenon is that China’s stock market, still largely closed to foreigners, has been drifting lower over the past year.
Across the world, however,‘China plays’, or investments that assume a continued boom in China, are far above the early 2009 levels. Those plays range from currencies of major commodity-exporting nations to stock in global oil, gas and mining companies.
No one gains if the slowdown comes hard and fast, and some China bears think it will, given the scale of the boom and the related credit excesses. But the bears are probably as wrong as the bulls, because China still has some room to grow. Compared to Japan in the mid-1970s, China is less heavily urbanised and is also aging less rapidly.
Also, Japan downshifted smoothly to a 6% growth path in the 1970s and then nearly 5% in the 1980s before falling into a long period of stagnation.
China’s leaders can see what is happening and they are trying to manage a slowdown to a healthy middle-income growth rate — not fight it. That makes the collapse scenario far less likely. If China moves smoothly to a 6-7% growth path in the coming years, it will first feel like a bit of a recession for that country but following some transition pains, such a development will hardly be cataclysmic for the global economy.
After all, as the Chinese proverb goes: a dead camel is still bigger than a horse. Beyond the psychological shock of falling below the 8% growth target for the first time in years, the fact that the Chinese economy is worth more than $5 trillion now implies that even at a 6% growth rate, it will remain the largest contributor to global growth in the coming years. The wider impact will be on those who bet it all on near double-digit growth in China continuing this decade.
|'Be prepared for Labour trouble' The best way to deal with the ongoing trouble is to absorb the oil shock and avoid any wrong policy .. Gerard Lyons Read full story|
|Learn, localise, lateralise to grow India needs a new mantra for development, focusing on implementation and execution, not just on numb.. Arun Maira Read full story|
Bruce Bueno De Mesquita
'Game theory' is a fancy label for a pretty simple idea: that people do what they believe is in thei..