Time for China to shift economic engines
To Jim O'Neill, China's economic future comes down to a US$4 trillion question. That's how much additional gross domestic product (GDP) the former Goldman Sachs bigwig and economic guru who coined the acronym "BRICs" reckons China would contribute globally by raising its share of consumption-to-GDP to 50%. Today, it's less than 40%.
This is less about what China can do for humankind than the Covid-19 reality dawning on President Xi Jinping. China's export engine isn't what it used to be in a pandemic-wracked world. Though the US is stabilizing, the Delta variant is sending fresh storm clouds its way as Europe and Japan underperform.
China thus must expedite moves to get its consumption engine going. Of course, Xi's government has been pledging to do just that since 2012. That direction was underscored in last year's announcement of the "dual circulation" policy, which at its core aims to stimulate more domestic demand.
But with the globe enjoying a synchronized growth expansion - a rare occurrence - exports were doing the job, reducing the urgency for China to recalibrate growth drivers.
"It is therefore in everyone's interest that Chinese consumption demand continue to increase," says O'Neill. "While it is unlikely that China's consumption spending will ever reach 70% of GDP, an increase to 50% is a perfectly reasonable and desirable target for both China and the world."
Trouble is, he adds, "the goal of boosting domestic consumption poses a dilemma for the Chinese development model." O'Neill notes that investment spending and exports are what have fueled the Chinese juggernaut for most of the past three decades - and especially the early years.
"China's modest consumptionto-GDP ratio stands in stark contrast to that of the United States, which, at around 70%, is probably excessive," O'Neill says. "The upshot, in terms of the global economy, is that Chinese consumer spending is tech- nically only about one-third that of US consumer spending."
Xi's policies over the last year are working at cross purposes with these goals. Abroad, Beijing's actions in Hong Kong, its stance on
Taiwan and its provocative maneuvers in the South China Sea have alarmed the global community.
At home, his battle against technology companies and their founders is causing stock market turmoil at a moment when Xi needs to re-energize his capital markets. His clampdowns on a growing number of industries at home risks deadening the spirit China needs to develop a more innovative and productive model.
"At the end of the day, China will need the rest of the world if it is to increase both domestic consumption and productivity," O'Neill says. "The best way that China can improve its international standing is through soft diplomacy that respects other countries' preferences and aspirations, rather than treating them as sources of confrontation. Without such a change in attitude, China will not reach its goal of doubling incomes within 15 years, leaving its people - and the rest of us - worse off as a result."
Granted, it takes two governments to generate the level of enmity currently clouding the global outlook. The US-led trade war since 2017 has pushed China to turn prickly. Donald Trump may be gone, but US President Joe Biden has been slow to unwind taxes on mainland goods and other non-tariff barriers.
But Xi has had a breather. Since January, Biden has spent far more time tending to domestic economic challenges than trying to pull jobs away from China. Biden, it appears, is set on raising US productivity and supporting entrepreneurship.
In other words, he's more focused on building economic muscle at home than US-China trade dynamics.
China needs to accelerate its own great rebalancing in order to raise GDP rates. The slow pace of change has become particularly apparent in the Covid-19 era. And this belies the popular narrative that China is ready to lead the global economy.
Saving not spending
"The weak recovery in Chinese household spending is certainly holding back the momentum of global growth," says economist Shaun Roache at S&P Global Ratings. "If anything, China's growth is being supported by the rest of the world, as reflected in a rising current account surplus" over the last year.
This is not to say that progress has not been made on Xi's watch. The role of exports in boosting GDP was about 36% in 2016. At the end of 2020, it was roughly 18%.