China Research

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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