China’s key to fu­ture growth

China Daily (Canada) - - SHANGHAI - By YU RAN in Shanghai

yu­ran@chi­nadaily.com.cn

China is ex­pected to weather cur­rent eco­nomic and fi­nan­cial stresses and com­plete its jour­ney to­ward be­com­ing one of the world’s ad­vanced economies by shift­ing de­ci­sively to a pro­duc­tiv­ity-led growth model, ac­cord­ing to the lat­est re­port by McKin­sey Global In­sti­tute (MGI).

The re­port showed that China’s new pro­duc­tiv­ity-cen­tered ap­proach will gen­er­ate $5.6 tril­lion ad­di­tional GDP as well as $5.1 tril­lion ad­di­tional house­hold in­come by 2030. The con­sump­tion level will also surge from the cur­rent 38 per­cent to 49 per­cent, sim­i­lar to the lev­els in de­vel­oped coun­tries.

Amid record-break­ing ur­ban­iza­tion and in­dus­tri­al­iza­tion, China’s GDP has ex­panded 25-fold and Chi­nese have been driv­ing one-quar­ter of global con­sump­tion growth since 2010. The re­port also re­vealed that the pri­vate sec­tor in China is vi­brant, earn­ing three times the re­turn on as­sets of state-owned en­ter­prises which in 2015 em­ployed 15 per­cent of ur­ban Chi­nese work­ers. This is down from the 60 per­cent in the 1990s.

“Our new re­search re­veals that China has the means to head off fur­ther prob­lems and com­plete its jour­ney to­ward be­ing a fully-fledged ad­vanced econ­omy if it shifts to a new ap­proach cen­tered on pro­duc­tiv­ity,” said Jonathan Woet­zel, di­rec­tor of the McKin­sey Global In­sti­tute.

The re­search em­pha­sized that re­cent de­vel­op­ments in the coun­try have al­ready demon­strated that the in­vest­ment-led growth model is run­ning out of steam and cap­i­tal pro­duc­tiv­ity and cor­po­rate re­turns are fall­ing even as debt is ris­ing.

The ra­tio of non-per­form­ing loans could reach 15 per­cent in 2019 from to­day’s of­fi­cial fig­ure of 1.7 per­cent. Ev­ery year that China con­tin­ues on

the cur­rent path could in­crease the cost of deal­ing with bad debts by 2 tril­lion to 3 tril­lion yuan ($310 bil­lion to $460 bil­lion).

“If China per­sists with this ap­proach, this could in­crease the risk of a hard land­ing. Even then, we do not an­tic­i­pate a sys­temic bank­ing cri­sis, but a sub­stan­tial and un­nec­es­sary slow­down in growth would be likely,” said Woet­zel.

In the 15 years lead­ing up to 2030, McKin­sey es­ti­mates that more than 200 mil­lion peo­ple may need to shift sec­tors, from agri­cul­ture, com­modi­ties and in­fra­struc­ture to ser­vices and con­sumer man­u­fac­tured goods.

“More pro­duc­tive en­ter­prises will drive in­no­va­tion and create sus­tain­able jobs crit­i­cal to the shift to a mod­ern, con­sump­tion-driven econ­omy. But pro­duc­tiv­i­ty­growth will also lead to a ma­jor shift in the GDP mix and em­ploy­ment struc­ture of the econ­omy,” said Seong Jeong­min, MGI Se­nior Fel­low.

The re­search also pointed out that China has cer­tain poorly per­form­ing com­pa­nies that pull down the av­er­age GDP, although top-per­form­ing Chi­nese com­pa­nies of­ten have re­turns com­pa­ra­ble with those of top US com­pa­nies in their in­dus­tries. More than 80 per­cent of eco­nomic profit in China’s econ­omy comes from fi­nan­cial ser­vices. In short, the in­vest­ment-led model has left the econ­omy dis­torted in ways that lower pro­duc­tiv­ity and re­duce the sus­tain­abil­ity of growth.

“China has to serve the needs of the mid­dle-class, en­able new busi­ness pro­cesses through dig­i­ti­za­tion, move up the value chain through in­no­va­tion, im­prove busi­ness op­er­a­tions through lean tech­niques and higher en­ergy ef­fi­ciency, and strengthen com­pet­i­tive­ness, in or­der to raise the pro­duc­tiv­ity in a long term per­spec­tive,” said Seong.

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