China’s GDP growth this year is now expected to exceed 8 per cent according to Lou Jiwei, the head of CIC, China’s biggest sovereign wealth fund. Last year, China accounted for about a third of global growth. This year, with shrinking economies in Europe and Japan and, despite firm signs of recovery, still lacklusture growth in the US, China is likely to contribute more again.
It is prudent then to consider what are the main downside risks to China’s growth outlook. China has demonstrated over recent years that domestic demand is more than capable of making up for a comparatively weak export performance. The risk of political shocks can be set aside – though ever present, the probability of one destablising the economy in the short to medium term must be considered very low.
Some economists – more so among foreigners than locals – are concerned about the great imbalance between savings and investment in China as a result of deliberate government policies to repress consumption. The result via the savings and investment identity in GDP accounting is accumulating external surpluses. That is to say, output which is neither consumed nor used in investment ends up as exports.
The leading proponent of this view is Michael Pettis, a Beijing-based economist and scholar. He has recently published a new book setting out his arguments. In The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy Pettis argues that that with rising levels of debt in China a sharp and disruptive correction will be inevitable.
This will see an end to China’s three-decade old, investment-led growth model. The Great Rebalancing will require domestic household consumption to rise and savings to fall, so investment as a share of GDP will fall. Pettis believes this adjustment, once started, will be wrenching. Economic growth could be expected to fall to politically dangerously low levels of 3 per cent to 4 per cent and stay there for over a decade.
These are serious arguments that command a great deal of respect among experts on the Chinese macroeconomy. Reassuringly, however, for Australia and others who depend so heavily on China’s continuing economic growth, there is an emerging view critical of the Great Rebalancing arguments. This view is much more sanguine about the sustainability of China’s growth.
The relevance of trade to China’s economic growth has diminished significantly since the global financial crisis, as one would expect when China has been growing so much faster than its trading partners. Since 2009, exports minus imports, that is, net exports, have been negative. So trade has been a drag on China’s GDP growth, not a contributor to it.
On the savings and investment identity, investment has increased dramatically since 2009. The lower share of savings relative to investment during this period has caused the current account surpluses to fall. This is far from the ideal way to rebalance the current account, but at least it also will ease one of Pettis’ main policy challenges, which is rising tensions in China-US trade relations.
On the question of debt levels – the trigger for an abrupt and disruptive Great Rebalancing – China’s total debt-to-GDP ratio does not seem to be as worrisome as many think. Recent work by the Washington-based Peterson Institute for International Economics concluded that China’s debt levels have "not increased significantly since the lending boom of 2008-09 [and] while on the high side for an emerging market economy, are not yet at a crisis point”.
The Great Rebalancing thesis also underestimates China’s consumption, or exaggerates the degree of repression caused by negative real interest rates on bank deposits, restrictions on labour organising to raise wages, an undervalued exchange rate and a poor social safety net. It might be because many of these things (other than negative real interest rates) have been changing that consumption has grown on average by 9.5 per cent for the past five years, higher than China’s GDP growth over the same period. Chinese scholars recently argued in the Global Times that because of a number of well known measuring problems, the share of consumption in GDP may be as much as 10 to 15 percentage points higher, or 60 to 65 per cent of GDP, which is more in line with the historical experience of other fast growing developing economies.
Perhaps the biggest weakness with the Great Rebalancing is the assumption that it will need to be abrupt and disruptive and require, for China, exceptionally low rates of GDP growth. China is still a poor developing country. It is not what you see – when you can actually see something through the blanketing smog – from your window in Beijing, Shanghai or Guangzhou.
China has decades of consumption catch up ahead of it. Its per capita income is just 11 per cent of the US’s. It is the 93rd poorest country in the United Nations league table. And it has decades of rural to urban migration ahead, with some 300 million people to settle permanently in urban areas.
Urban people consume a lot more than peasant farmers. This is why the major brand stores from around the world still have ambitious expansion plans, opening stores in emerging cities the names of which none of us have heard of before. The Great Rebalancing is underway, but it is neither disruptive nor harmful to economic growth.
Geoff Raby is Chairman and CEO of Beijing-based advisory firm Geoff Raby & Associates, and a former Australian Ambassador to China.