In 2014 China has experienced a slowdown in economic growth. How can it realise its two ‘double’ targets?
Since 1979, China’s economy has grown at an average rate of 9.8%, a rate sustained for over 30 years. This is an economic miracle never before seen in human history, one that has far exceeded expectations. Today, China’s per capita GDP has reached USD 6,800, making it an upper middle income country.
During the eighteenth National Congress of the Communist Party of China, two economic targets were proposed: by 2020, real GDP and per capita income of urban and rural residents should be double that of 2010. In order to achieve the first target, China’s economy only needs an average annual growth rate of 6.8% from 2014 to 2020; three percentage points lower than the previous rate of 9.8%. Taking into population growth into consideration, in order to double income by 2020, GDP requires an average growth rate of 7.3% per annum. It is entirely feasible that China will sustain an economic growth rate of 7%-8% per annum in the coming decade or even longer. On a purchasing power parity basis, China’s average per capita income in 2008 was 21% of that of the US. This difference is the same as that of Japan and the US in 1951, Singapore and the US in 1967, Taiwan and the US in 1975 and South Korea and the US in 1977. After this point, these four countries and regions each sustained a growth rate of 8%-9% for 20 years; this is something that China can also achieve. Taking into account the strengthening of the RMB, by 2020 China’s per capita income can reach USD 12,700, the level of a high-income country. This will be a milestone in China’s great rejuvenation.
Is China’s slowing growth rate purely due to internal factors in its institutional mechanisms?
Lately there has been a lot of talk of “the collapse of China”. The key reason is that since the first quarter of 2010, China’s economic growth rate has slowed for 17 quarters, the longest period since China’s “Reform and Opening up”. A number of domestic scholars believe that China’s slowing growth rate is due to internal factors in its institutional mechanisms. Indeed, as a developing country, certain institutional mechanisms suffer from backwardness. As a transitional country, there are definitely some distortions in the system. This is not in contention.
However, since 2010 the slowing of economic growth has been due to external factors. Of the BRIC countries that have performed well in the past, the economic growth of India and Brazil have both slowed to a much larger extent than China. According to the IMF’s World Economic Outlook, India’s economic growth in 2010 was 10.3%; 6.6% in 2011; 4.7% in 2012; 4.4% in 2013. Brazil’s was 7.5% in 2010; 2.7% in 2011; 1% in 2012 and 2.3% in 2013.Comparatively, China’s economic growth was much better: in 2010 it was 10.4%; 9.3% in 2011; 7.8% in 2012 and 7.7% in 2013.Some high income economies in Asia have also experienced greater slowdowns than China: South Korea’s growth rate was 6.3% in 2010; 3.7% in 2011; 2% in 2012 and 2.8% in 2013. The figures above show that we cannot use internal factors to explain China’s slowdown in economic growth because other middle income countries and high income countries have experienced similar or even greater slowdowns since 2010.
China’s largest export market is the Eurozone but the Eurozone has not yet fully recovered from the financial crisis of 2008 and has experienced negative growth in 2012 and 2013. China’s second largest export market is the US, whose economic growth rates were 2% and 1.8% in 2012 and 2013 respectively, which were far lower than its historical level. As the world’s third largest economy, Japan has been in economic recession for over 20 years. Because of this, China’s external trade growth has been extremely weak, the weakest of “troika” of investment, consumption and exports. The countries mentioned above, India, Brazil, South Korea etc. have also encountered the same situation.
For developed countries to realise full economic recoveries, it is essential that they improve their economic competitiveness via structural reform, but in the short term it may lead to an increased unemployment rate. In light of this, it is very difficult to carry out structural reform and developed countries may, like Japan, experience ten, twenty years of economic malaise.
Should we rely on consumption or investment?
In light of international economic conditions explained above, China’s economy can no longer rely on export driven growth and must change its orientation inwards – in other words either consumption or investment. But should it be consumption or investment? In China this has been much debated.
We believe that the economic driver should be investment. Consumption is a target of economic growth but should be built on the premise of increased income levels. The prerequisite for increasing income levels is to increase labor productivity. How can we increase labor productivity? On the one hand, we must rely on technological innovation and production upgrades to help each worker produce more and more, or to increase additional value. On the other hand, we must continually improve infrastructure so that market transactions can be carried out smoothly, thus lowering transaction costs. Whether it is technological innovation, production upgrades or infrastructure improvements, investment is essential. Only through investment can we realise sustained growth. Only increasing consumption and not labor productivity will force us to rely on savings – once savings are gone, we will have to rely on debt and once we need to repay this debt we will face a crisis.
The prerequisite for investment driven growth is effective investment. This so-called effective investment is investment that should bring a high economic return and high social return. Only with this kind of investment can we truly increase labor productivity. The key issue is not whether we should invest, but do we have good investment opportunities. After over 30 years of investment driven growth, do we still have good investment opportunities? The answer is, unequivocally, yes.
Firstly, as a middle income country, China has abundant space for production upgrading. Developed countries are already at the forefront of production and technology, making it difficult to continue investment. For China it is particularly easy to carry out production upgrades and technological innovation in the global production chain and technology chain. Secondly, China is still severely lacking in infrastructure. In the past, the majority of infrastructure investment was between cities and infrastructure within cities such as railways, subways and various pipe networks are extremely lacking. Thirdly, China’s environmental pollution is serious and improving the environment requires investment. Lastly, the urbanisation rate is not high enough. Currently this stands at 53%, compared with 70%-80% in developed countries, which is a relatively large difference. There are still many good investment opportunities in China and this is the biggest difference between developing and developed countries.
(Justin Yifu Lin - The author is a member of the Standing Committee of the Chinese People’s Political Consultative Conference (CPPCC) and Vice Chairman of the CPPCC Economic Council)
(Article published in “Beijing Daily”)