China’s key to future growth
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.