“In the case of China, there is a lack of balance, co-ordination and sustainability in economic development.”
Who would dare to make such a downbeat assessment of the world’s most dynamic economy before a gathering of infliential foreigners in the heart of China itself? The answer is Premier Wen Jiabao at the recent “summer Davos” in Tianjin. He is right. When almost everybody believes China is invulnerable, what might go wrong? As Andy Gove of Intel said: “Only the paranoid survive.” Mr Wen is wise to be similarly cautious.
Yet, as Mr Wen also noted, “the past two years have seen China emerge as one of the first countries to achieve an economic rebound and maintain steady and relatively fast economic development under extremely difficult and complex circumstances.” Mr Wen added: “We owe our achievements to the implementation of the stimulus package.” as a result, the economy grew by 9.1 percent in 2009 and 11.1 percent in the first half of 2010.
This success has followed three decades of very fast growth. At purchasing power parity, gross domestic product per head has risen almost tenfold since the “reform and opening up” began under Deng Ziaoping, in 1978. It is a remarkable record, but not unprecedented. China’s rate of “catch-up” on the US is not so very different from that of Japan prior to the mid-1970′s and South Korea between the early 1960′s and the financial crisis in 1997.
What is different, however, is the scale of the country and its initial poverty. China’s GDP per head (at purchasing power parity) was a mere 4 percent of US levels in 1978. Even now, it is less than a fifth. The latter was in the position of Japan in 1950 and of South Korea as long ago as 1978. If China were to achieve Japan’s relative GDP per head before growth slowed sharply, it would enjoy another 25 years of fast economic expansion , to emerge with much the world’s biggest economy.
What could stop the juggernaut? Some point to rapid monetary growth, credit bubbles, asset price overshoots and bad debts.
The most interestingly pessimistic view comes from Michael Pettis of Peking University’s Guanghua School of Management. The characteristic of Chinese growth is that it is “unbalanced”, as Mr Wen notes: it is highly dependent on investment as a source of demand and driver of supply. It is, in a sense, the most “capitalist” economy ever.
Thus, between 1997 and 2009, gross investment rose from 32 percent to 46 percent of GDP, while household consumption fell from 45 percent of GDP to a mere 36 percent. Meanwhile the rising investment rate has been the main driver of growth. In the early 2000′s, “total factor productivity” – increase in output per unit of input – were also important. But the contribution of higher efficiency has been waning.
This, Prof Pettis argues, is a “souped-up version” of the Asia development model we saw in Japan and South Korea in earlier decades.
This has been an extraordinarily successful development model, but notes Prof Pettis, it eventually runs into the constraints of “massive over-investment and misallocated capital”.
Financial Times – 22 September
WHAT ARE YOUR THOUGHTS ABOUT THIS ARTICLE?
While sobering thoughts and admissions it is good to know that the leadership in the PRC understand the China reality and are not deluding themselves.
As our business operates across APAC from Hong Kong with a lot of work in China we see in our pre-employment background checking, employee engagement surveys and exit interviews the scale of the sustainability problems across organizations and their challenges to find and retain talent that can lead, manage and grow their enterprises.
For China it is more than simply producing top quality goods efficiently although that too is challenging for some. The bigger problem is increasing the value add of goods produced in China versus shipping overseas. Lowy Institute offers some excellent insights into how this is a real challenge for China. Lowy cite studies that suggest that the foreign value add to Chinese exports is between 35% and 55% suggesting that China can and should grow that larger thus leading to higher paying work and sustainable enterprises.
In our business we see the challenge to source and keep the talent who can develop the business and others who understand the needs and who can go out and get it done.