Time to be realistic on China’s economy
The predicted ‘ hard landing’ never happened — but the nation still has a long way to go on the route to prosperity
There has recently been a great change in the tone in public opinion about China’s economy. In the previous six or seven years, some domestic and foreign economists have been pessimistic about China but, since the first half of last year, a new term — resilient — has been used to describe the Chinese economy, and people now believe it will not suffer a “hard landing”.
Time magazine published an edition with the headline “China won” on its cover. Some opinion leaders at home have also hailed the rise of China, without statistical backing, saying that China has overtaken the United States — and such claims have been growing.
However, it is important to remain sober and take a sensible and realistic look at China’s development. There is some truth in saying China is strong now, especially in the manufacturing industries that have been badmouthed for many years. Now people think the country is a manufacturing power backed by creation and innovation.
But we need to see that China has problems, too.
Thanks to the exchange rate, China’s GDP leaped in 2017 — the country’s GDP per capita was around $8,000 (6768 euros; £5911) in 2016, and jumped to $9,600 last year, using the exchange rate at the end of year — coming close to the benchmark of $10,000 that would allow it to be designated a middle-income country.
However, compared with the GDP per capita of developed countries, we are less than 20 percent of the US, while South Korea is 70 percent of the US. We say China is the world’s secondlargest economy, but that’s because of our large population; the US population is only one-fifth of ours.
A slew of factors greatly determine our economic growth: education, science and technology, innovation, the environment, systems and mechanisms. They all matter when it comes to sustainable growth.
As a developing country, we must be fully aware that the gap with developed nations is huge and that we cannot afford to be complacent.
We can learn a lesson from Japan. In the 1980s, Japan’s per capita GDP almost caught up with the US and people were convinced that it would become the world’s No 1. The Japanese were so overwhelmed by their success that they felt the economic bubble would not burst and did not take any effective measures.
After the bubble did burst, Japan suffered sluggish economic growth for 20 years. Although its GDP per capita is now 70 percent that of the US, it is nothing compared with its golden age.
Therefore, while we applaud the Chinese accomplishments, I am concerned that if we ignore the weaknesses and problems and don’t take action, they will eventually become a big problem.
One of China’s major achievements, often overlooked, is that there hasn’t been an economic crisis in the 40 years of high growth, which is unprecedented globally.
When developed countries grew rapidly in the early years, they experienced an economic crisis about every 10 years, which was followed by a period of recession. Although the Chinese economy has had cycles, with growth as high as 14 percent and as low as 6 percent, we haven’t experienced a big crisis, nor did we see a big recession.
Our central government is also looking at potential risks. One of the main topics this year is to guard against financial risks. Financial risks exist in every corner of business and may affect some of the current operations of our business, including financial operations.
China’s economy has not maintained over 10 percent consistent growth for the past 30 years. We experienced a cycle in the 1990s because of an overheated economy during 1992-94, and the growth rate declined for five consecutive years until 1999. Then the economy bottomed out from 2000 to 2002, and entered a new period of growth in 2003.
China’s economy overheated twice in the past four decades, the first time during 199294, the other during 2005-07, with 14.2 percent growth in 1992 and 14.1 percent in 2007. We adjusted ourselves for a year in 2008 and then the global financial crisis struck. As a result of the government’s stimulus package, China had another round of growth above 10 percent in 2009 and 2010.
Growth began to slow in 2011 and continued to do so till 2016. Growth in 2017 was slightly higher than in 2016, but that doesn’t mean a rebound will happen soon.
The ’90s witnessed an L-shaped economic development path. This time is the same, and China’s economy will linger around the bottom range for some time because many problems have not been resolved. I disagree with some claims saying that China has entered a new cycle, a V-shaped rebound.
In the short term, we will maintain growth of 6.5 to 7 percent. Our macroeconomic policies are neutral — no more stimulus or contraction. Maintaining neutrality helps us to make adjustments and reforms that need to be done before moving on to the next round of normal growth.
In the long run, we need to fully recognize the many challenges that China’s economy faces, including rising wages and environmental costs, and the widening of the income gap.
In addition, we’ve got great potential that waits to be tapped.
Our current GDP per capita of more than $9,000 is far behind the $40,000 to $50,000 of developed countries. After the many years of industrialization, China’s actual industrial level is less than 70 percent. About 30 percent of our workers rely on agriculture as their main source of income. Our urbanization level is just 55 percent. About 70 percent of the population is in low-income groups, half being farmers, the other half being migrant workers. This situation presents enormous room for growth and consumption. What are uncertain now are external factors. On the positive side, the recent economic recovery in developed countries is indeed strong. The United States is at a historical high of 3 percent growth, and Europe has had relatively high growth of 2.6 percent. This is beneficial in boosting our export growth, as it did last year.
Then there is the Trump effect. Do we witness the rise of protectionism and does this mean that globalization will stall and go backward? We need to see the bigger picture.
Globalization was first promoted by developed countries, driven by the interests of their capital, enterprises and multinational corporations. And this driving force of globalization is still there. Multinational corporations still allocate resources globally, despite some of their workers opposing globalization since they find it unfavorable to themselves.
The new driving force for globalization is from developing countries, including China. Ten years ago, developing countries were conservative about globalization and were afraid of their economies being ruled by multinational corporations. They later found that globalization can actually benefit them by facilitating development.
China is in a special situation now. We want to continue to attract foreign investment to develop the country, as many places still lag behind, while, at the same time, the large amount of capital accumulated in the past 20 years beckons us to go global, looking for new growth points.
So in the short term, trade protectionism may lead to globalization taking a step back or a detour, but it will definitely march forward in the long run.
Given this external environment, China should pay more attention to its domestic market, where new forces are fueling growth.
The first is the change in the business environment. China has been encouraging entrepreneurship and innovation and become more tolerant of the problems it created along the way. For example, bike-sharing and car-sharing businesses are not allowed in many countries, but China decided to let them take the step first and fix the problem later. The innovation and entrepreneurship China is encouraging today will become the country’s new economic driver and contribute to a large part of growth in the years to come.
The second is the development of our financial system, especially in the direct financing area, such as venture capital, private equity and equity investment.
Five or 10 years ago, we did not have such mechanisms, and entrepreneurs had to apply for loans from banks when they wanted to start a business, which was very difficult. Now people have a new mindset and provide money for venture capital. The increasing financing options will boost innovation and entrepreneurship and will benefit our future development.
Another phenomenon in recent years is the expansion of consumption in China.
In developed countries, the whole population is a consumption force. But in China, the main consumers were only young people, because the elderly didn’t have much savings, since they didn’t earn much in the past.
Now a wealthier generation has reached retirement age, and these people are still energetic when they retire at 60. With plenty of time and money, these people have started to join the main consumer group. From this point of view, China’s consumption is expanding.
Another point is that China’s manufacturing sector has injected a new force into the country’s growth. As a number of Chinese manufacturers have improved product quality, the image of Chinese manufacturing in the world has changed. “Made in China” is no longer associated with low quality, and people have started to trust our product quality; so in the future, the manufacturing sector will embrace a new period of growth.