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The myth of China’s unbalanced growth
China’s announcement on Tuesday that inflation in May hit a three-year high of 5.5 per cent and industrial expansion exceeded expectations will buttress those who see an inevitable economic crash coming. But even those who think a soft landing is possible seem to agree that China’s economic growth is unbalanced, with these imbalances widely blamed for trade surpluses with the west. This view, however, is much exaggerated.
Compared with other countries, China’s consumption to gross domestic product ratio of 35 per cent is low, suggesting consumption is not being repressed. China’s investment to GDP ratio of more than 45 per cent is also exceptionally high. This leads many to propose a standard solution to “rebalancing”: China must increase consumption and dampen investment.
The problem is that this view is static, while growth is unbalanced. What matters is the direction of change. It is true that China’s private consumption to GDP ratio has declined by 15 percentage points over the past 15 years. But this mirrors many east Asian economies and also that of the US during its own industrialisation in the 20th century. Despite all the admonitions, this ratio will not begin to increase until savings decline or labour’s share of income increases.
Savings rates will not fall, however, until there is a credible social welfare system. Increasing labour’s share of income is also not a viable solution: paradoxically, as more workers move from agriculture to industry – which is a good thing – labour’s share of income will fall. Contrary to expectations, labour’s share of income within industry is also declining because of the expanding role of the private sector relative to the state – but this is to be welcomed, too.
Behind today’s figures and more talk of unbalanced growth, the truth is that China’s economy will change – in time. As the availability of rural labour falls and the relative shares of state and private enterprises stabilise, the ratio of consumption to GDP will begin to increase. Meanwhile, the perception that China has invested too much is also misleading. Much of the surge in investment over the past decade is due to housing construction, where the country is still making up for the shortfalls from the Mao era.
The bottom line is that China’s growth is not unbalanced. Even so its trade surplus continues to be a major irritant with the west. In principle the problem is not hard to solve but the solution runs counter to conventional wisdom. China’s trade surplus is now running at two-three per cent of GDP, so if consumption, investment and government expenditures all rose less than one percentage point of GDP each, the problem would evaporate. But in which order should this happen? The best near-term solution rests in higher public expenditure, paid for by increasing dividend payments from state enterprises to the government. Since pre-tax profits of state enterprises have surged to more than 7 per cent of GDP, channelling just a fraction of these surpluses into public social services would make a big difference.
If China acted in this way, its already high investment rates may not need to decline in the short term, while these actions would help to eliminate China’s trade surplus sooner rather than later. Such actions would prevent trade surpluses from re-emerging when the pace of investment is likely to fall by the second half of this decade. They can be achieved without compromising China’s growth or restraining global demand. And perhaps most importantly, they would allow China to dispel the myth of its unbalanced economy once and for all.
ps.前两天要事在身，导致选文与前一天the Best重复，以更换文章，抱歉。
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