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China and the balance between sustainable growth and pragmatism

The statement by Chinese Minister of Finance Lou Jiwei this week to reporters in the United States that Chinese growth might fall below 7% in 2013 caused a short panic in the global markets. Xinhua news…

Chinese leaders speak of “fast, sustainable” growth. But structural issues stand in the way. AAP

The statement by Chinese Minister of Finance Lou Jiwei this week to reporters in the United States that Chinese growth might fall below 7% in 2013 caused a short panic in the global markets.

Xinhua news agency issued a clarification later, putting the figure at 7.5%, the level which has been the stated objective of government policy since the start of the current Five Year Programme guiding the country’s macroeconomic policy from 2011. Even so, Lou’s comments, misreported or otherwise, only showed how jittery people are inside and outside China about the level of Chinese economic growth in the coming years.

Since the onset of the global financial crisis in 2008, the new Premier of China, Li Keqiang, has consistently spoken of the objective of delivering “fast, sustainable” growth. Specifically, he has talked over the last four years of structural imbalances in the Chinese economy that are an impediment to better growth. His fundamental premise has been that China cannot expect to export its way to growth in the future, despite that fact that exports will remain important. It has to find sources of growth through addressing its own internal economic structural problems. These fall into four key areas.

The first is consumption. Chinese continue to save 40% of their earnings, despite the lack of easy ways for them to invest their money. Property has been favoured, but restricted by government intervention when the market looked in danger of overheating from 2011. The Shanghai and Shenzhen stock exchanges are popular but famously volatile. Chinese bank account rates are so low that, taken with inflation, putting money in them is like a tax upon those trying to save. Despite this, the cultural proclivity of Chinese to save remains something persistent attempts by the government through stimulus measures have failed to shift. Consumption as a proportion of GDP remains at less than 40%, almost half of that in a developed economy.

The second is services as a sector in the economy. Agriculture makes a third of GDP, manufacturing about 40%, and services the remainder. Li has stated several times that this is too low. He has argued that even in developing economy, services take up almost half of GDP. China wants to create a high end, better quality economy. But to do this it needs to stimulate growth of the service sector.

The third is gross fixed investment as proportion of GDP. China has one of the highest levels in the world with a figure of 46% expected in 2013, against figures like 16% for the US. This high proportion has been the case for much of the last three decades. And again, even for developing economies, this is a staggeringly high figure.

Finally, rates of urbanisation. While it is true that China has engaged in one of the largest processes of urbanisation in human history since 1978, and now has as many living in towns and cities as in rural ones, the fact remains that it is still, according to Li, under-urbanised, and needs to engage in another bout of movement into cities in the next decade.

The new leadership can be expected to promote policies that start to deliver “fast, sustainable” growth by attacking these four great structural issues. With higher consumption, higher services sector rates, lower gross fixed investment, and deeper urbanisation, a rate of 7% growth over the coming five years is something that the Chinese government can live with. What it clearly needs is a predictable growth rate which comes from economic activity which is geared towards addressing these internal imbalances.

Looking at these, it is clear that one of the major priorities is to develop human resources through better education, support innovation within China so that it starts to have more of its own proprietorial technology in high growth, better investment return areas, and does much more on delivering green energy and sustainability. In all of these areas, at the moment, Chinese leaders show that they are aware the country is deficient and needs to become much more competitive. They also show awareness of the need to create an economy more supportive of entrepreneurialism, and one where the finance sector is likely to become increasingly significant.

If we look at a city like Shanghai, with a per capita GDP of around US$12,000, bringing it closer to middle income country levels, we start to see where the rest of China might be heading. But trying to create a policy framework which embraces the different economic terrains that exists across the country is immensely challenging.

There are a number of key strategic choices that the Chinese government now need to make to address the four issues above and carry on delivering growth. We are likely to see bolder policy innovation and more radical decentralisation as the government lets provinces set some of their own targets to tackle these generic issues.

The current Chinese leaders might be described as conservative in outlook, but they are also profoundly pragmatic. And for them, whatever delivers growth sustainably is the thing they look for. Anything else apart from this is secondary. That will be the story of the next three to five years.

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15 Comments sorted by

  1. Tony Xiao

    retired teacher

    The China's government set its annual GDP growth target for the 2011-2015 period at 7 percent,
    The GDP target of 7.5 percent target was for the 11th Five-Year Program period 2006-2010..

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  2. Gerard Dean

    Managing Director

    Funny word sustainable. Most times it is mentioned on The Conversation, it pertains to the green utopian dream that the human economy and population can expand and at the same time become remain sustainable.

    China should be congratulated for dragging itself out of corrupt imperial rule and brutal communism to take its place as the next economic, and dare I say it, military superpower.For too long Chinese peasants toiled in rice fields and died young. Electricity, coal, oil, hardwork and western technology are freeing them from their past.

    But, the Chinese should remember the lesson from the Starbucks coffee chain. Eventually you have to stop growing. Japan, the world's 2nd biggest economy only 20 years ago and touted as the 21st century superpower, is now stultifying because their economic growth stopped.

    It is going to be a very interesting century.

    Gerard Dean

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  3. Dale Bloom

    Analyst

    One of the saddest articles I have read for some time.

    The planned future for millions of Chinese is urbanisation and consumerism.

    Their quality of life is an afterthought, or simply not on the list.

    Do economists think urbanisation and consumerism the best future for Australians also?

    I think they do.

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  4. Liam J

    logged in via email @gmail.com

    Sustainable growth is doubleplus good!

    In other words, it is orwellian nonsense peddled by economists, churnalists and other salesmen to prove their loyalty to the economic rationalist suicide cult. A less publicised article of faith is that the collapse of the planets carrying capacity is filled with unprecedented opportunities for profit, eg. milking Chinese 'business migrants' a.k.a cashed up eco-pocalypse refugees.

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    1. James Hill

      Industrial Designer

      In reply to Liam J

      What about ecological sustainability?

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    2. Liam J

      logged in via email @gmail.com

      In reply to James Hill

      Which is what? Planting token numbers of native & food plants while continuing to source 99% of material consumption from poorer (less white), out of sight places? Putting a fraction of ones wastes in bins marked 'recycling'? You'll have to define the term.

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    3. James Hill

      Industrial Designer

      In reply to Liam J

      Ecological sustainability is The international Greens Party principle derived from Gro Harlem Brundtland's definitions of Ecologically Sustainable Development and intergenerational equity.
      On the net somewhere for those interested.
      The most important distinction is that the ecology actually includes people while for some environmentalists eg The Wilderness Society, people are notably excluded.
      The difference between typical "greenies" and The Greens is, perhaps, that having included human beings…

      Read more
    4. Liam J

      logged in via email @gmail.com

      In reply to James Hill

      Ayn Rand was not a Philospher [sic], she was a propagandist for selfishness and, not coincidentally, a very neurotic and unhappy individual. Greens are often just as naive as Libertarians, but at least the former are heading away from fascism/corporatism.

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    5. James Hill

      Industrial Designer

      In reply to Liam J

      Now, now Liam, Rand, after her career as a novelist, became an academic, specialising in Philosophy.
      Which is not to say that Ayn Rand is beyond criticism, but perhaps she might have been right about some things, such as her definition of political principles, which arose from the academic phase of her career.
      Other philosophers such as Plato argued for a Philosopher-King as a leader, while Aristotle promoted a written constitution.
      The Greens, with their principles, are closer to Aristotle than…

      Read more
    6. James Hill

      Industrial Designer

      In reply to Liam J

      I am glad that you thought your original statement required qualification, Liam.
      So Rand was a philosopher but certain of her fellow philosophers did not agree with her.
      Did she get given an honorary doctorate on the basis of her popular but controversial works of fiction and thus inspire the enmity of academics?
      That'll be very unusual among philosophers then?
      Do you agree with her statement on political principles, or does it need to be vetted by other "real" philosophers before you can determine…

      Read more
    7. Liam J

      logged in via email @gmail.com

      In reply to James Hill

      You've yet to justify your claim that Rand was really a philosopher, see my link for why she fails.

      Despite your hyperbole on censorship though, you are quite free to continue trying to push your offtopic barrow in any thread you like, moderators willing. Good luck finding anyone interested.

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    8. James Hill

      Industrial Designer

      In reply to Liam J

      Liam I have read your link and find plenty of discussion which refutes your claim.
      In particular one poster claims that Rand preferred Aristotle, and that those who follow Plato are therefore critical of her.
      Are you suggesting then that Aristotle was not a Philosopher either?
      I refer to this in my previous posts when I say that Aristotle preferred that written constitutions should lead democratic communities whereas, in contrast Plato promoted The Philosopher-King as the more effective "leadership…

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    9. Liam J

      logged in via email @gmail.com

      In reply to James Hill

      I 'prefer' Rachael Carson, does that make me a marine biologist? Thanks for your replies, they confirmed my view that Randians are tar babies.

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