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.