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> The myth of China’s unbalanced growth
> China’s announcement today 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 remain confident that 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 to other countries China’s consumption to gross domestic
> product ratio of 35 per cent is exceptionally low, suggesting
> consumption is not actually being repressed. China’s investment to
> GDP ratio of more than 45 per cent, meanwhile, is exceptionally
> high. This leads many to propose a standard solution to
> “rebalancing”: China must increase consumption and dampen investment.
>
> The problem is this view is static. Growth, however, is inherently
> unbalanced. What matters are not indicators pointing to imbalances,
> but 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 is a pattern that mirrors many east
> Asian economies, and also that of the US during its
> industrialisation own in the 20th century. Despite all the
> admonitions, this ratio will not begin to increase until household
> savings rates decline or labour’s share of income increases.
>
> Savings rates will also not fall anytime soon, because there is as
> yet no credible social welfare system. Households are currently
> saving more because they have doubts about the viability of
> pensions, while social security deductions are seen as a tax,
> encouraging more saving rather than less. Growing aspirations for
> home ownership also ratchet up savings. All of these factors
> contribute to a prolonged upturn in personal savings rates.
>
> Increasing labour’s share of income is not a viable solution at this
> time either. Paradoxically, as more workers move out of agriculture
> and into industry – which is obviously a good thing – labour’s share
> of income will fall. Labour’s share of income in agriculture is
> almost 90 per cent, but in industry it’s only 50 per cent. Workers
> enjoy higher earnings and productivity increases, but the percentage
> of income that goes directly to workers actually drops.
>
> 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. In
> the end, the declining share of labour – which shapes the
> consumption pattern – is a consequence of China moving to a more
> efficient growth path. It is not a problem.
>
> 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 – just as we have seen in other higher income countries.
> But China is still several years away from this.
>
> The perception that China has invested too much is also misleading.
> Actually, China’s capital stock relative to GDP is lower than other
> comparable east Asian countries. Moreover, 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.
>
> In all this we must also remember that directing resources away from
> investment to consumption may be neither feasible nor desirable.
> China’s investment-led growth model, by generating faster growth
> than otherwise would have been possible, has in fact arguably led to
> sustainably higher – not lower – consumption levels. The country’s
> yearly 8-9 per cent growth in consumption, and 10 per cent in real
> wages, puts China at the top of its peers.
>
> 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
> around 2-3 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 not with higher consumption but with public expenditures, 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, but with the right financing
> vehicles there needs to be more spending on social housing and less
> high-end speculative construction. Together with continued support
> for social infrastructure, these actions would be enough to
> eliminate China’s trade surplus sooner rather than later. This would
> also buy the necessary time to improve welfare and consumer credit
> programmes so that households are eventually inclined to save less
> and spend more.
>
> 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, allowing the west’s recovery so it can
> continue coming out of the global economic slowdown. And perhaps
> most importantly, they would allow China to dispel the myth of its
> unbalanced economy once and for all.
>
> Yukon Huang is a senior associate at the Carnegie Endowment and a
> former country director for the World Bank in China.
>