China Research

For years, China has been discussing the necessity to enter a new growth path. Originally, the discussion arose from economists’ warning that China’s growth will not be able to rely on cheap labour and exports endlessly as population growth slowed. The thrust of the argument at that time was that China had to shift to a more knowledge-based, innovation-driven development path or, in other words, should shift to higher stages on the global production chains. The warnings seemed increasingly plausible when wages rose in Southern China due to a lower flux of migrants and the impact of the new labour law of early 2008.

Later, representatives of the US government, amongst others, pressured China for supporting local demand as part of the global remedies against the global financial crisis and China’s huge trade surplus with the United States. China’s export-driven growth model was said to be unsustainable, as it contributed to global imbalances and exposed China to too much risk. Hence, China’s stimulus package, announced in late 2008 and implemented throughout 2009 and 2010, was lauded internationally. The stimulus package did trigger an investment boom, even though, as was to be expected then and has become obvious today, it created substantial follow-up problems. At any rate, the contribution of final consumption to GDP did not change significantly. As far as there was a tiny increase in final consumption to GDP this resulted from government consumption, not household consumption.

The discussion about a necessary change in China’s development path again gained traction in the months before the Chinese leadership change. This time the discussion expanded against the background of local government debts, declining profitability of state-owned enterprises, fluctuating exports and ever increasing environmental problems that were perceived as a result of the stimulus package and the investment-driven development path of the last decade. Different visions, hopes and interests led to the common expectation that the new Party leadership under Xi Jinping would initiate substantial changes in economic policies. In this context, China’s need for a new growth path again was linked to the idea of a consumption-led growth model. Triggering consumption at home would lessen export dependence, stabilize GDP growth etc.

Most recently the March session of the National People’s Congress has confirmed this line of thinking. For example, the recently propagated “2014-2020 new urbanization plan” states that “domestic demand is the basic force of our economic development and the largest potential for expansion of domestic demand lies in urbanization”.

So, it seems as if China’s future growth path is expected to be urbanization driven and therefore demand driven. Does this mean that the early experts who called for a new growth path can be happy because their warnings are finally understood? Can the US exult because finally the trade balance will tilt to their favour? And can the Chinese government look forward to a new growth impetus that helps overcome the problematic legacy of the stimulus package? I think it is too early to be that optimistic.

First, the remedy is not new. Last time the Chinese government grasped to an urbanization strategy for solving economic problems was at the end of the 1990s when the introduction of private ownership of housing led to a surge in urbanization, real-estate investment and – for about three years – an increase in the consumption to GDP ratio. While this indicates that the new industrialization strategy may indeed contribute to domestic consumption, the recipe as such would not be new and the impact may not last long.

Second, past experience is that public investment tends to increase in the years after a leadership change. Against this background, the urbanization programme can also be interpreted as an invitation to local government to invest in real estate programs, city and infrastructure development etc. It would still be a development path driven by investment. This may not be the intention of the central government but it is a likely outcome.

Third, the challenge remains to find occupation for the new urbanites. Where will they work? In the service sector or in labour-intensive production? We do not know, yet. Whatever the development will be, it will influence the growth path. Last but least, the vision of consumption-led growth still implies that the products for consumption have to be produced somewhere. This could be in China, it could be abroad. In any case, the problem of the environmental impact of global consumption pattern that has led to China’s environmental problems, will not be solved by China following a US like consumption-led growth model.

Doris Fischer
Professor, University of Würzburg, China Business and Economics

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Doris Fischer’s article above is illuminating. She points at different inconsistencies and impediments in China’s new consumption-driven growth model which she also calls an “urbanization model”. I agree with her doubts – but would like to argue partly with some additional points.

Doris Fischer singles out a number of questions and conclusions that have been neglected or simply not been recognized so far. One is the possible strength of the planned urbanization process with its effects on private consumption (furniture, clothes, food, cars, etc,). Another one could be the ever increasing population in the metropolitan and other city areas which per se should strengthen the demand for consumption goods, supported in my view also by the planned deregulation of the – so far – very impeding urban registration process (“hukou”). Fischer also raises the question whether the massive plans of urbanization via local investments rather should be regarded as a local investment issue than primarily a plan for sustained higher growth of private consumption. Here we can find an obvious inconsistency in the official Chinese plans.

In Doris Fischer’s eyes, the new generation of Chinese leaders is creating more private consumption and – at the same time – also more public investment. I wonder how such plans can be brought in line with partly already existing high local indebtedness? She also raises very correctly the very important question where all these new jobs in the urban areas should be created. I wonder also how these migrating people can be integrated in the intended process of improved and new technology (see the corresponding decisions from the Third Plenum). Furthermore, one should get confused when thinking more deeply about the environmental consequences of the prioritized urbanization process. How can the huge challenges from air pollution, poor water quality and waste be handled in real life? Where are the decisive government attacks against all the existing impediments to a clearly improved environment (which the whole globe and the Chinese people want to see)? They cannot be watched yet on a wider scale.

However, I’m sure that the Chinese policymakers are familiar with all the environmental threats that rapidly accelerating urbanization may cause. I got this impression when I visited China two months ago. Thus, we come back to the conflicts of goals in the China’s marketization and deregulation process – conflicts of goals which I will take up in a paper at the SNEE conference in Mölle/Sweden in May 2014. These conflicts of goals may also be a main motivation for the dampened estimate for China’s potential GDP-growth somewhere in the neighborhood of 5 ½ -5 ¾% in 2020, according to LNU’s recent China Survey Panel.

All in all, indications remain strong that China’s economy will be downsizing (somewhat) in the next few years, probably also structurally by moving to the intended consumption-driven growth. This structural change of growth model will be more complicated to handle than the (previous) export-/investment-driven model. But it would not be a bad development by definition if major improvements of the environment were allowed to happen and simultaneously reasonable growth rates still could be achieved in line with the predicted potential rate of growth.

One big question, however, has not yet been considered by markets and most economists very seriously:  Could it happen that Chinese private households will become more visibly interested in an acceleration of their financial investments five to ten years from now instead of markedly more rapidly increasing consumption – i.e. at a time when the supply of reasonable financial investment products finally has been widened and modernized?

At least theoretically, it could. What could happen in such a case, will be another story to elaborate on at some point in the future.

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

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