Opinion

Pessimistic views of China’s economy are unconvincing

In late 2001, I first used the phrase BRIC to discuss the likely rise of Brazil, Russia, India and China as growing shares of the world economy and outlined a number of scenarios in which it seemed pretty inevitable that their share would rise sharply by the end of that decade. 

By: Date: April 7, 2015 Topic: Global Economics & Governance

In late 2001, I first used the phrase BRIC to discuss the likely rise of Brazil, Russia, India and China as growing shares of the world economy and outlined a number of scenarios in which it seemed pretty inevitable that their share would rise sharply by the end of that decade.  In 2003, along with some Goldman Sachs colleagues, we first projected what the world might look like by 2050 if the BRIC and other large emerging economies reached their potential, a world that would be dramatically different than the one prevailing at the time.

At $10 trillion, China is around one and a half times the size of the other three BRIC countries put together

It was these two papers that led to the beginning of the focus on the phrase BRIC and indeed, my own central role in the story that since unfolded. What is especially noteworthy over the subsequent 13 and ½ years is just how dominant China has become within the BRIC group in terms of economic size, as well of course, it’s increasing importance to the world economy. At the end of 2014, China’s economy surpassed $ 10 trillion in current US$ and according to the World Bank, in purchasing power parity terms (PPP), actually was larger than the US. At $ 10 trillion, China is around one and a half times the size of the other three BRIC countries put together. It is also bigger than the combined size of France, Germany and Italy. It is about twice the size of Japan (in the 2003 Paper, we thought it might take China until 2015 to reach the size of Japan, never mind twice). Its economic size has nearly risen tenfold since I first mentioned the word “BRIC” and since the 2008 global credit crisis, China has doubled its own size.

In terms of size and growth, perhaps it is especially important to point out that not only did China grow at lot more than expected in the last decade, which was also true for the other three BRIC countries, but so far, in this decade, it is the only one that has –so far- surpassed my expectations.  The other three, Brazil and Russia in particular, India less so, have disappointed my expectations notably. Back in 2010, I assumed China would grow by 7.5 percent over the decade 2011-2020. After four years, it has averaged 8.0 percent.

All of this means that China is still on track to achieve the 2027 dateline for when it could surpass the US in current US$ terms, and also, due to China’s dominance , the BRIC countries collectively could become as large as the G7 countries collectively. Of course, 12 years is a very long time and a lot of things could develop differently, but if China carries on the way it has been developing, it will occur. Importantly in this regard, I would like to emphasise that I assumed China would slow in terms of its real GDP growth rate, so unless it slows dramatically, this slowdown is consistent with China becoming the world’s largest economy. I will turn to the critical issues facing China below.

While measures of inequality suggest that the gap between the richest and lowest has risen,  hundreds of millions of Chinese have been taken out of poverty in the last 13 and ½ years

It is of course, exceptionally important to point out that nominal GDP growth in its own right is not necessarily so key for China’s inhabitants as it is their individual wealth that matters to all of them (along with probably their health and happiness). Given that China’s population is widely regarded to be reasonably stable, or if anything, declining modestly, the country’s average GDP per capita- the simplest measure of wealth- should probably still broadly follow the path of its nominal GDP. Importantly again, GDP per capita has jumped sharply to nearly $8 thousand per head, reflective of the large growth rate. While measures of inequality suggest that the gap between the richest and lowest has risen, it is also the case, that hundreds of millions of Chinese have been taken out of poverty in the last 13 and ½ years, a key contributor to the UN achieving its millennium goal of halving poverty by 2015. In fact, this goal occurred by 2010, five years earlier, and has led to UN and World Bank researchers suggesting that the acceptable level to escape poverty might need to be raised. China has been easily the most important country contributing to these remarkable developments.

So what are China’s prospects now?  What does it need to focus on as policy priorities? And how should it deal with its international importance and role in global governance, including the use of its currency, the RMB?

In recent years, I have participated in many debates with other well-known commentators who are much more sceptical about China’s future, and while of course, I may be blind to the validity of their concerns, I find many of the arguments unpersuasive. Much of this is due to one simple fact, and that is the urbanisation of China’s citizens.  According to official data, just over 50 percent of China’s people today live in cities, a vast rise compared to 20 years ago, but still significantly below the 70 percent that is typically found in more advanced and wealthy economies. As I shall explain, if China were already 70 percent urbanised today, then I would share, at least some of, the concerns of others. There is however a significant amount of evidence going through history going as far back as the industrial revolution in the UK, that urbanisation is a huge force that propels economic growth as urban dwellers drive all sorts of positive economic forces, both as consumers and producers. The OECD has recently published a very interesting study, consistent with this, that suggests the largest urban areas are typically associated with the strongest improvements in productivity.

If it were true that China is closer to the 70 percent norm, then some of the powerful forces that are so natural would cease, and I would be less optimistic. Of course, it is possible that the official statistics about the level of urbanisation today in China underestimates the actual true figures, and I know some that believe this, but I don’t see the evidence as compelling.

China needs to go ahead with stated plans to give so called migrant workers the same rights as those from urban areas.

Linked to this simple observation, the most important policy that I believe China needs to pursue is to go ahead with stated plans to give so called migrant workers the same citizen rights as those that originate from urban areas. While I can see the challenges that may be raised by a sudden mass conversion in all cities, if true urban dwellers who have moved from the country can’t get the full rights, it follows that the conceptual benefits of urbanisation – starting with the very basic desire to own a property, and then to furniture it with consumer durables- cannot occur. It also follows that these migrant workers will be likely to maintain high levels of personal savings that they may need to help them to achieve some of the available resources that modern policies are making more available to recognised urban dwellers such as healthcare and insurance.

I have met some China sceptics that argue that due to the success of the one child policy, there are not enough male urban migrants to participate in the presumed further urbanisation process assumed above, which if true, would be an issue. In this regard, I also view the decision to formally dismantle the one child policy as very sensible. Economic growth is driven by two factors over the long term, the number of people that work, and their productivity. If China had not relented, then it was highly likely that China would face a serious demographic challenge in the future. I also believe that as individual parents become wealthier, they are likely to derive great comfort from deciding how many children they might want. There is quite a bit of evidence that as people get wealthier (and more informed), they typically choose to have less children anyhow, so any fears that some policymakers may have of a renewed population explosion are probably not valid. So as I say, dismantling the one child policy in a non-disruptive manner is highly welcome.

The share of consumption in overall GDP needs to be much higher. 

Against the background of these two critical steps, I admire the government’s desire to grow the share of consumption in overall economic affairs. Indeed if the above two key steps are adopted with confidence, awareness and sincerity, they might be the biggest steps necessary to achieve what many often think is an elusive goal for China.  From what I can tell, based on the official data, it is probably the case that the share of consumption in overall GDP has risen modestly in recent years, to somewhere between 35 and 40 percent of GDP.  It needs to be much higher, not to the unsustainable level of 70 percent that the US reached –and probably contributed greatly to the global credit crisis- but something in the 50 to 55 percent vicinity at least.  Indeed, something around 60 percent would be quite normal and sustainable. 

In addition to pursuit of full urban rights for migrant workers, steps to ensure a credible social security and healthcare system and the development of a pension scheme of some sort are other necessary ingredients for helping the rise of the consumer, as this would allow for a decline in China’s too high personal savings rate.  Other normal cyclical factors such as employment and strong real income growth are obviously necessary too but it is these structural forces that need to change more.

It is possibly the case that, already the true level of personal consumption might be actually higher than is generally captured in aggregate economic data , due to the peculiarities about how investment estimates are made. Further improvements to all official economic statistics are an obvious necessity for Chinese policy (as indeed is true virtually everywhere in the world). But even with any revisions, it is important that China does make progress to raise the role of its consumer.

Part of this rationale is simply due to the fact that it is quite hard to believe that the remarkable growth of each of exports and investment spending of the past 20 years or so, can continue.  Exports have already slowed significantly since the global credit crisis, which is not surprising given that the main determinant of export growth is usually domestic demand in export markets as well as the relative price of exports, of which a nation’s currency is usually critical. With the weakness of demand in many developed countries and the steady appreciation of the RMB, the days of rampant export growth for China are almost certainly over. This doesn’t mean China cannot export or cannot compete, but it’s seemingly never ending rise as an exporter was not sustainable in a world where many others like to export, and in some cases, have urgent need.

It is important that China does make progress to raise the role of its consumer.

Currently it is the high level of investment spending that is more concerning, both because it is not sustainable but also because if, as the last few years suggests, the same amount of investment is producing less additional GDP than before, then this is something that is not desirable and likely to involve economic losses. Luckily as with a number of other challenges, policymakers recognise this dilemma and seem eager for investment to grow more slowly, and make room for consumption to rise.

Consistent with these themes, I am a big fan of the focus on the “quality” of growth, the desire for a more knowledge based economy and society, and these are mutually consistent as is the necessary desire for a shift to less polluting and more efficient energies so that the quality of the urban and rural environment can be maintained in China.

Which brings me to the last two topics, finance and the role of China in global economic governance.

It is way beyond time that the US and Europe made space for China to have a bigger role in the IMF and World Bank.

It is going to be fascinating to see whether the IMF chooses to include the RMB in its SDR basket at the end of 2015, when the Fund is due to undertake its mandatory five year update to the currency composition. China clearly has satisfied two of the main three ingredients now for many years, both its economic size and its share of world trade.  While it might not satisfy all observers test of the third, its usage as a reserve currency, the rise of the RMB in this regard in recent years is noteworthy and I think it is really important than the IMF go ahead and make a positive decision on the RMB inclusion and not get swayed by arguments that China’s currency isn’t truly free floating and possibly related resistance from the US to give China more monetary importance globally. As I have long argued elsewhere, it is way beyond the time that the US and Europe made space for increased China ( and other large emerging countries) to have a bigger role in the IMF and World Bank, and to play their required stepped up role inside the G20. While US internal politics is probably holding back the Congressional approval of agreed plans by G20 members, it would be a bad outcome if these matters stopped the inclusion of the RMB in the SDR.

In this regard, I applaud the recent decision of the UK government to choose to be one of the first countries to sign up to be a member of the newly formed AIIB.

I am not as convinced as many as the need for the RMB to be fully floating currency as that of the Dollar or Euro, at least the urgency of the need, and think it is much more important that China develop its domestic interest rate and other capital markets before it opens up completely the use of its currency.

Next year, 2016 promises to be a hugely historic moment for the world and China when China becomes the chair of the G20 in January. This is a chance for China to show that it is both capable and eager to take more global responsibility, consistent with its economic might. China should seek to lead the G20 by placing policies on the agenda that it would not face opposition from the rest of the world. In this regard,  I am pursuing dialogue with friends and acquaintances in policy circles to suggest that China should  place the topic of antimicrobial resistance ( AMR) front and centre of that agenda. I am currently leading a Review for the UK Prime Minister to find a solution to this massive, global and shared problem and am eager for this challenge to be elevated to becoming a G20 issue.  we are all heading to an environment where we are going to be resistant to antibiotics which will endanger the health of society around the world as we know desire including in hospital treatments as well as for common modern procedures.In a paper, my Review team published in December 2015, we showed that if not solved by 2050, there could be at least 10 million people dying a year, more than one million of which would be in China. We simultaneously showed that there could be a loss of an accumulated $ 100 trillion of global GDP, and that China and other leading emerging powers would be the most negatively affected.  I cannot think of a more fitting development than for China to lead the world through its first G20 hosting and help us all avoid this unnecessary outcome. 

Read more:

Making space for China

Realizing the Indian dream


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