1、Can the new leadership revive China?,1,Can the new leaders revive China?Introduction,Smooth transition unlikely to consumer-led growthDanger is that lower investment reduces growthSeveral factors stand in the way of the transition,Chinas five-year plan, like most optimists on its economy, foresees a
2、 continued rapid rate of growth, perhaps at 7-8% a year for real GDP, with future growth no longer led by investment and exports, as in the past, but by consumer spending. This compares with growth in recent years that has exceeded 10% a year, with capital spending over 48% of GDP in 2011, exports o
3、f goods and services at 29%, and consumer spending only just over 35%. (The balance is made up of government spending at 13% and a 26% deduction for imports.) This monthly review will argue that:1. A smooth transition to a consumer-led economy is unlikely for bothdemand-side and supply-side reasons2
4、. Both the difficulties of this transition and the underlying developmentof the Chinese economy imply no better than 5% annual growth inthe next 3-5 years3. Without major, painful and unpopular policy changes China growthcould be stuck at or below 5%, with financial crisis also likelyKey aspects of
5、the argument require interactive demand-side and supply- side reasoning, eg:The chief inhibitor of consumer spending is the low ratio ofhousehold income to GDP, not a high personal savings rate. Butgetting the investment ratio down will require tight conditions thatdiscourage investment, and therefo
6、re also imply resistance to wage& salary growth. Any resulting rise in the consumer spending ratiocould therefore occur through weaker GDP, not faster consumption.Taking a short-term supply-side aspect of recent trends, the moreextravagant parts of the excessive capital spending, boosted topromote “
7、economic recovery” in the face of the collapse of the pre-2008 export-led model, have pre-empted labour resources andforced up wages and costs elsewhere.Looking at the longer-term supply side, the growth of GDP hasincreasingly been driven by greater capital input, as opposed tomore labour and/or “to
8、tal factor productivity” (that part of growth thatarises from pure improvement in products, processes, costs, etc.). Ifthe increase of capital input (ie, net investment) is to slow radically,so will growth (given the now static Chinese labour force) unlesstotal factor productivity spontaneously pick
9、s up speed. Much of thisanalysis will be concerned with policies needed to bring this about.By way of background we have to understand:1. The switch from an export-led economy until 2008 to a greater,reliance on domestic capital spending since then, largely loanMonthly Review - November 14, 2012,40%
10、,2,financed in both cases to preserve adequate demand in the faceof a very high national savings rate2. The upsurge of inflation in 2010-11, and loss of international costcompetitiveness, followed by a lurch into deflation this year3. The role of controlled interest rates, capital movements and thee
11、xchange rate, including recently soaring real interest rates4. The disparity of income between households and businessChinas monumental savings and investmentChinas gross national saving & investment, % of GDP 55%,National savings rate,Gross capital formation,50%45%area between lines represents a su
12、rpluson goods and services trade 35%,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,Savings as % of GDP50%40%30%,20%10%0%,business + government,personal,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,The 51% savings rate is unprecedentedly high,Chinas nationa
13、l savings rate, about 51-52% of GDP in recent years, is mountainous, even by export-led Asian miracle standards. In Japan, for instance, in the decade to 1974 it averaged 37%, the same rate as in Korea in the ten-year run-up to the Asian crisis in 1997. While the sharp ascent of the savings rate aft
14、er 2000 was initially a rebound from the major impact of that crisis on China, by 2004 domestic overheating forced restraint ofMonthly Review - November 14, 2012,3,demand, and the continued savings (and income/growth) upswing depended on huge gains of export market share until 2007-08. China therefo
15、re fell very much into the pattern of export-led emergence, pioneered by Germany in the 1950s, followed by Japan, Korea, other Asian Tigers, and finally China.,Households only account of a small share of saving,The image of thrifty Chinese people is widely accepted, but misleading as a guide to how
16、the savings rate has got to 51% of GDP. The chart above is,just to jolt one out of the idea that it is people doing the saving all thosestories in the papers about no pensions, healthcare and schooling costs,etc. Out of the 51% savings rate, 43 %-points are saved by business andgovernment, less than
17、 8% by households. It is true that the householdsavings rate has actually been rising simply not much relative to GDP Chinas personal income, spending & saving60%50%40%30%20%10%0% -10%,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,savings ratio, % of disposable income consumer spending, % o
18、f GDP,disposable income, % of GDP,Because household disposable income is only 42% of GDPTransition to consumers means loss for the corporate state,As a share of personal disposable income, savings have doubled over the past decade, to 18%. They are up by less vis-vis GDP, because of the chief proble
19、m: disposable incomes share of GDP has fallen by ten %- points, about one fifth. When it comes to shifting demand from investment and exports to consumer spending, the chief problem of Japan, to take the most conspicuous example, is that its personal disposable income is only 60% of GDP, versus 75%
20、in the US with a similar size of government sector (ie, tax take). That Chinas has fallen to 42% of GDP over the past decade identifies the problem as extraordinarily difficult to address. For example, to reverse the ratios of capital and consumer spending in China from the current 48%/35% to the le
21、ast that is needed, perhaps 35%/50%, would, with a consumer savings rate of 18%, require personal disposable income to be 61% of GDP, 19 percent-points higher than the current 42%? This is a huge shift, even over a ten-year timescale.In China, therefore, as in Japan, the salient issue of saving, and
22、 now investment, being too high has, as its ultimate cause, the skewed distribution of income against consumers. The combination of business and,government is probably more closely intertwined in China than in any othermajor economy and it commands 58% of gross domestic income. Out ofthis 58% the am
23、ount saved in 2011 was 43 %-points, and the amountMonthly Review - November 14, 2012,growth,4,invested was 48 %-points. This combined group will be referred to in this review as, alternately, the “command economy” or the “corporate state”. Its actions embody by far the greater part of the excessive
24、saving and investment that disfigure the Chinese economy. The stated goal of the Five Year Plan of shifting to a consumer-led economy requires a cut in the power and income of the corporate state, including implicitly the Party at its head. We shall examine below (p.16) various policies by which thi
25、s goal might be pursued.Distortions arising from the 2009-11 recovery,China like Japan pre-1973, Korea pre-Asian CrisisDistortions invalidated by financial crisisUS “pump-priming” underpinned export-ledUS debt deleverage removes this demand,Chinese investment was reasonably stable at 41-42% of GDP i
26、n the five years to 2007, before the crisis affected the modus operandi of the economy. Excluding inventories, fixed investment was 39-40% of GDP. The real GDP growth rate averaged rather over 10%. By comparison, in the five years to 1973 Japans gross fixed investment averaged 35% of GDP, while Kore
27、as averaged 37% in 1990-97. Korea was further behind Americas “cutting edge” of income and productivity then, than Japan in 1969-73; and China is even further behind now, than Korea was in the early 1990s. So the Chinese pre-2008 ratio of 39-40% is consistent with these precedents, given the scope f
28、or catch-up, the pace of growth (10%-plus) and the export- led, investment-intensive development model common to all three.The post-crisis problem is that this model has to a great degree been invalidated by the financial crisis, yet Chinas reaction to this has been to raise its dependence on invest
29、ment as the leading element of growth. These points must be addressed in turn.The crisis effect. The US current account balance went from a consistent surplus of about 1% of GDP in the 1950s and 1960s to deficits that mounted steadily, reaching a peak of 6% of GDP in the mid-2000s. The export-led gr
30、owth model of development used this US import “pump- priming” ie, exporting to the US as the market of first resort to generate a world trade boom in which heavy investment in industries of comparative advantage, funded ultimately by high domestic savings (especially profits) enabled rapid output an
31、d income growth to be achieved. They avoided the debt crises of countries that lacked the savings and typically put too much emphasis on import substitution (mostly in Latin America and pre-1980s India). This model originated with Germanys Wirtschaftswunder in the 1950s and 1960s, before being follo
32、wed by Japan, Korea, other Asian Tigers and finally China in the 25 years to 2008.The drawback to this model is that it increasingly came to depend on the knock-on result of US trade deficits: a build-up of debt in US domestic sectors. This was general in the 1980s, and led to the high-leverage cris
33、is and recession of 1990-93, whose cure may well have been a material factor in the Asian crisis of 1997-98, as the Asian economies tilted toward too much domestic demand, especially investment. And the drastic cure for theMonthly Review - November 14, 2012,likewise,5,Asian crisis initiated the savi
34、ngs glut spreading from Japan (its original locus) to Asian Tigers, the offset being a renewed debt splurge in America, this time mostly in business, driven by the tech bubble. As this collapsed in 2000-02, with the savings glut spreading to German-centred Europe (euro- driven) and from 2005 to Chin
35、a, the US debt splurge was redirected to households, whose finances blew up in mid-2007, starting the latest crisis.,US current account deficit to narrow further, Europe markets in recessionSwitch to consumers also means to services less investment neededInvestment stimulus in 2009 was the wrong dir
36、ectionExport help via yuan peg,As of now, US corporate finances are in surplus, and households have deleveraged, alongside lower house prices, while the US government deficit, 12% of GDP at the peak in 2009, is now down to 8% of GDP and falling fast. The current account deficit has been halved to 3%
37、 of GDP, and looks like heading down from there. The export-led development strategy in its conventional form is now obsolete especially given the shambles in Europe, so its market is also in recession. Countries are no longer able to rely on overseas surpluses as an outlet for excessive savings or
38、a source of excessive profits especially giant economies like China.Chinas misconceived policy response to the crisis. Leaving aside the difficulties of adjustment needed if Chinese growth is to be driven in future by consumers rather than an export-led investment boom, there are good supply-side re
39、asons why such growth would under any conditions be slower. These have to do with it being easier to transfer manufacturing skills and technology from the West to China, with economies of scale, in areas where it has comparative advantage, compared to development of domestic service sectors. But thi
40、s slower potential growth, arising from the post-crisis change in global conditions, argues for a significantly lower investment rate, especially if service sector output in the low-wage Chinese context were to require less capital intensity than manufacturing.What China actually did, however, in re
41、sponse to the crisis was strong stimulation of both exports and investment the two standard sources of growth in the past. In the six years to 2007, real investment had already grown at 13% a year, versus 11% for GDP in those boom years. (Its ratio to GDP did not rise much as the relative price of i
42、nvestment was falling.) After dipping to 9.7% real growth in 2008, real investment was boosted by aggressive government stimulus to grow by 22.5% in 2009, followed by 13.7% in 2010, only slowing to 9.5% in 2011 as excessive housing and real estate prices gave rise to policy restraint. Investment ros
43、e from 41.6% of GDP in 2007 to 48.3% in 2011.On the export side, the governments response to the crisis was to halt the,needed rise in the yuan/dollar exchange rate from spring 2008 to spring2010, and then restrain to less than 5% a year. No doubt attemptingrecovery through export growth was regarde
44、d as the tried and trustedremedy for the recession. But both these stimulus policies have producedperverse results: most obviously the investment stimulus at a time whenChina needed to reduce its investment dependency, but also the artificiallylow exchange rate which added further major inflationary
45、 pressure,rendering much of the recovery self-defeating.Monthly Review - November 14, 2012,6,Export crash causing the recession drove the policy response wronglyAs a result, adjustment now needed is far greater,Recession there certainly was. Chinas own published real GDP growth figures would appear
46、to contradict this, but no serious analysts believe them, and neither, it has recently emerged, does the incoming Premier. We calculate real Chinese GDP on the basis of the nominal data, whose movements correspond much better with other economic data than the official real growth figures; we adjust
47、these by our GDP price index, simply derived from the official changes in export, import, fixed-asset investment and consumer prices, also government wages, each weighted according to its share of GDP. On this basis, over the two quarters 2008 Q4 and 2009 Q1 real GDP fell 3%, a 7% annual rate. This
48、was, of course, led by the export crash hence the governments natural, if ill conceived, response.The combination of these policies has proved damaging. The adjustment of the economy to consumer-led growth has been made much more difficult,by heading firmly in the wrong direction for four years. The
49、 investmentexcesses and undervalued yuan produced a burst of inflation that haswiped out Chinas cost advantage in world markets, and brought home witha vengeance obsolescence of the export-led strategy. Meanwhile, the worldrecovery has foundered, so the context in which China now has to achievemajor adjustment is more hostile than at any time since at least the Asiancrisis, arguably even than since the 1990-92 aftermath of 1989s difficulties.China inflates into trouble and now deflatesChinese margins squeezed, % change YoY20%15%10%5%0%-5%,
