Economic power but signs of concern
By Wang Yanlin |
September 8, 2010, Wednesday
|
Print Edition
Print Edition
HUANG Hai, a former Chinese assistant commerce minister, said on Monday in Beijing that China's retail sales may outstrip those of the United States, reaching 34 trillion yuan (US$5 trillion) by 2016.
With its rapid economic growth China is evolving into a global economic powerhouse.
China overtook Germany last year to become the world's biggest exporter and then nudged the US aside as it drove toward being the world's largest automobile market.
Last month, China's gross domestic product surpassed that of Japan's, making it the world's second-biggest economy.
Still, China is considered a developing country because its low per-capita GDP of US$3,910 is spread over a vast population, similar to that of Japan in 1974. Today Japan's per-capita GDP stands at US$39,000, analysts said.
There is a rising tide of economists and other analysts engaged in a contentious debate about the outlook for China's prosperity in a changing world where its role looms large. Many caution against reading too much into China's economic pinnacles just yet.
Among them is Paul Sheard, Nomura's global chief economist. He has warned that a faltering China could pose a significant threat to global prosperity and stability, and he cites three areas of prime concern.
The Lewis Turning Point Test
In Sheard's view, another challenge China faces is how to respond to the advent of the so-called Lewis Turning Point, named after Nobel Prize-winning economist Arthur Lewis.
Lewis identified that in developing economies a point will be reached at which supply of surplus rural labor starts to diminish, giving industrial workers greater bargaining power to demand wage increases.
Employment in China is still weighted toward the agricultural sector, but analysts expect that balance will swing to employment in the manufacturing sector in 2015.
The Lewis Turning Point may come earlier in China because of the nation's rapidly aging population, Sheard said. Recent incidents, such as the wage increases forced on Foxconn, the world's largest electronics contract manufacturer, by disgruntled workers highlight the growing clout of Chinese workers.
"A surge in wages is positive for consumption, but it can eat into profit margins, erode export competitiveness and, if passed on to consumers, trigger serious inflation," Sheard said.
Cheap labor used to be China's biggest selling point in attracting foreign investment that helped underpin its growth miracle. But China seems to be losing that advantage.
Slowing Potential Output Growth
The World Bank estimates that China's potential output growth averaged 9.6 percent from 1995 to 2009. But it projects the rate may slow to 8.4 percent between 2010 and 2015 and contract further to 7 percent by 2020 as a result of an aging population.
That could grind employment growth to a halt, while contribution from investment starts to level off.
If China's potential output growth slows too rapidly, excess demand in the economy could fuel rampant inflation and possibly swing the current account into deficit. Under such a scenario, investors would have to face the necessity to lower their long-term profit projections in China.
"The World Bank's projections highlight the urgency with which China needs to use its labor and capital more efficiently," said Sheard. "To achieve this, the government needs to harness market forces."
He suggests China should eliminate price subsidies on land, energy and water, increase its exchange rate flexibility so monetary policies can target the cost of credit rather than its quantity, require listed state-owned enterprises to pay bigger dividends, accelerate privatization, and remove barriers to entry in industries dominated by state-owned companies.
Too Much Investment Worry
Sheard has long worried about what he calls an uneven distribution of China's GDP arithmetic.
"In most economies, investment is typically the largest swing factor in GDP, and it can slump for a variety of reasons," he said. "Too much investment or low-quality investment can lead to overcapacity, an erosion of profits and wealth, rising non-performing loans and a loss of business confidence."
In China, investment accounted for 43.9 percent of GDP in 2008 and surged to 47.5 percent in 2009. That proportion can't be solely explained by stimulus introduced to protect China from the global financial crisis. Rather it is a reflection of a continuity of domestic policy that has resulted in investment topping 40 percent of GDP for the last seven years.
In other Asian countries that have experienced similar rapid economic development, their highest investment rates typically lasted seven to eight years but never reached the levels experienced by China.
Take Japan as an example. At its peak in the late 1960s, investment there ranged between 35 and 40 percent of GDP. By the mid-1970s, investment became an actual drag on the Japanese economy. In 1974, it fell 6.5 percent from a year earlier, and contracted by 5.2 percent in 1975.
"Granted, for a country still very much in development mode, there is no reason why high investment rates can't be sustained for years to come," Sheard said. "But with investment making up almost half of GDP, the economy is vulnerable if investment were to slump for whatever reasons, like policy errors, unforeseen shocks, social unrest or a deadly pandemic."
With its rapid economic growth China is evolving into a global economic powerhouse.
China overtook Germany last year to become the world's biggest exporter and then nudged the US aside as it drove toward being the world's largest automobile market.
Last month, China's gross domestic product surpassed that of Japan's, making it the world's second-biggest economy.
Still, China is considered a developing country because its low per-capita GDP of US$3,910 is spread over a vast population, similar to that of Japan in 1974. Today Japan's per-capita GDP stands at US$39,000, analysts said.
There is a rising tide of economists and other analysts engaged in a contentious debate about the outlook for China's prosperity in a changing world where its role looms large. Many caution against reading too much into China's economic pinnacles just yet.
Among them is Paul Sheard, Nomura's global chief economist. He has warned that a faltering China could pose a significant threat to global prosperity and stability, and he cites three areas of prime concern.
The Lewis Turning Point Test
In Sheard's view, another challenge China faces is how to respond to the advent of the so-called Lewis Turning Point, named after Nobel Prize-winning economist Arthur Lewis.
Lewis identified that in developing economies a point will be reached at which supply of surplus rural labor starts to diminish, giving industrial workers greater bargaining power to demand wage increases.
Employment in China is still weighted toward the agricultural sector, but analysts expect that balance will swing to employment in the manufacturing sector in 2015.
The Lewis Turning Point may come earlier in China because of the nation's rapidly aging population, Sheard said. Recent incidents, such as the wage increases forced on Foxconn, the world's largest electronics contract manufacturer, by disgruntled workers highlight the growing clout of Chinese workers.
"A surge in wages is positive for consumption, but it can eat into profit margins, erode export competitiveness and, if passed on to consumers, trigger serious inflation," Sheard said.
Cheap labor used to be China's biggest selling point in attracting foreign investment that helped underpin its growth miracle. But China seems to be losing that advantage.
Slowing Potential Output Growth
The World Bank estimates that China's potential output growth averaged 9.6 percent from 1995 to 2009. But it projects the rate may slow to 8.4 percent between 2010 and 2015 and contract further to 7 percent by 2020 as a result of an aging population.
That could grind employment growth to a halt, while contribution from investment starts to level off.
If China's potential output growth slows too rapidly, excess demand in the economy could fuel rampant inflation and possibly swing the current account into deficit. Under such a scenario, investors would have to face the necessity to lower their long-term profit projections in China.
"The World Bank's projections highlight the urgency with which China needs to use its labor and capital more efficiently," said Sheard. "To achieve this, the government needs to harness market forces."
He suggests China should eliminate price subsidies on land, energy and water, increase its exchange rate flexibility so monetary policies can target the cost of credit rather than its quantity, require listed state-owned enterprises to pay bigger dividends, accelerate privatization, and remove barriers to entry in industries dominated by state-owned companies.
Too Much Investment Worry
Sheard has long worried about what he calls an uneven distribution of China's GDP arithmetic.
"In most economies, investment is typically the largest swing factor in GDP, and it can slump for a variety of reasons," he said. "Too much investment or low-quality investment can lead to overcapacity, an erosion of profits and wealth, rising non-performing loans and a loss of business confidence."
In China, investment accounted for 43.9 percent of GDP in 2008 and surged to 47.5 percent in 2009. That proportion can't be solely explained by stimulus introduced to protect China from the global financial crisis. Rather it is a reflection of a continuity of domestic policy that has resulted in investment topping 40 percent of GDP for the last seven years.
In other Asian countries that have experienced similar rapid economic development, their highest investment rates typically lasted seven to eight years but never reached the levels experienced by China.
Take Japan as an example. At its peak in the late 1960s, investment there ranged between 35 and 40 percent of GDP. By the mid-1970s, investment became an actual drag on the Japanese economy. In 1974, it fell 6.5 percent from a year earlier, and contracted by 5.2 percent in 1975.
"Granted, for a country still very much in development mode, there is no reason why high investment rates can't be sustained for years to come," Sheard said. "But with investment making up almost half of GDP, the economy is vulnerable if investment were to slump for whatever reasons, like policy errors, unforeseen shocks, social unrest or a deadly pandemic."
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
