|Thursday, 15 November 2012 00:00|
Doubling GDP means Xi has to reinvent China
Given China’s unmatched record of a 9.9% annual GDP growth right since the time it began experimenting with socialism with Chinese characteristics in 1978, betting against China has always been a bad idea. Indeed, there is enough commentary from even Chinese leaders on how, while China’s export-cum-investment strategy has reached its natural limit, all that China needs to do is to recalibrate, to shift emphasis from investment to consumption and it can easily sustain a 7-8% growth rate. While the previous growth was enough to lift 600 million people out of poverty, a 7% growth means China will contribute a lot more to global growth over the next few years than the US and Europe combined. What should give pause to such optimism, however, is what outgoing President Hu Jintao said in terms of how corruption could cause the Communist Party’s collapse, and the points made in the Party’s resolution on Wednesday.
Interesting analysis by BNP Paribas Equities Research team (excerpted on the oped page today) identifies some of these faultlines that can trip up the Xi presidency. First the maths: between 1979 and 2008, roughly 4.8 percentage points (ppt) of China’s 9.9% growth could be attributed to its higher capital formation, around 1.2% to the increase in the labour force, and a massive 3.9 ppt to the increase in productivity. According to the BNP analysis, with the labour force ageing and its productivity no longer rising as fast, labour will contribute just 0.3 ppt in the next decade, capital formation another 3.2 ppt and productivity around 3.5 ppt, taking China’s growth to around 7% per annum—productivity, however, is notoriously fickle and depends on a host of reforms over the next decade.
A host of reform areas can be mentioned, once you recognise the export-cum-investment led model has largely been exhausted for a variety of reasons—from increasing trade protectionism to the rising renminbi (30% against the dollar in real terms since 2005)—but nothing quite tells the story like what’s happening in China’s labour market where real growth in wages has been outpacing GDP growth over the last decade. In 2005, hourly compensation in US manufacturing was around 40 times that of China; today, it is around 15 times and is likely to shrink to 11 times by 2015—the world’s largest chopsticks manufacturer, for instance, is now located in the US, not in China. Which is why the share of exports to China’s GDP has now started falling. With the rich-to-poor ratio getting a lot worse over the years, and the rich propensity to consume lower than the poor, shifting to a consumption-based society isn’t going to be easy. The damage to the environment is serious—just a third of waste water discharged meets specified standards—which is why the Party’s Wednesday resolution mentions ecological awareness and ecological progress so many times. Protests against industrialisation have risen dramatically and, for the first time in recent years, new project starts are lagging completed projects. Reforming the not-very-efficient state-owned-enterprises has now become critical if China is to encourage innovation and private enterprises … The list is a long one, but vital if Xi is to rise to Hu’s target of doubling per capita GDP by 2020.