Source: China Brief Insight

The American Chamber of Commerce-China and the Carnegie-Tsinghua Center for Global Policy recently co-hosted Yukon Huang at an event to discuss his new paper, Reinterpreting China’s Success Through the New Economic Geography. As part of the event, Yukon Huang discussed both real and perceived risks to China’s economic future in a China Brief Insight podcast with Josh Gartner from the American Chamber of Commerce.

China’s Economic Success Explained

The success of Chinese leader Deng Xiaoping’s economic development policy has been attributed to China’s geographic concentration of people, resources, and financial incentives in the coastal south, which created a competitive advantage for the country. Deng realized that by concentrating cheap labor and major ports in its coastal areas, thereby boosting China’s growth through exports.

Widening Income Disparity

As a result of China’s rapid growth in the past three decades, inequality between rural and urban areas, and inland and coastal provinces has increased; urban incomes have grown two times faster than rural incomes. This income gap has not yet become a significant problem, since both rural and urban populations have seen improvements in their standard of living, but it is not a sustainable trend. Reducing this income inequality will require higher productivity from China’s service sectors; this will enable rural residents who enjoy increased incomes to move to urban areas. To achieve this, the government must reform the Hukou, a system of residency permits, to facilitate the movement of labor and urbanization.

Consumption and Investment

China’s household consumption has grown at 8-10 percent for the past decade. Some observers argue China should invest less to reduce overheating in its economy; however, investment has served China well by improving labor productivity and making China competitive in the global marketplace. China should focus instead on increasing its tax revenues to fund improved social services, which will help speed up urbanization and household consumption in the long run.

Currency Argument

Contrary to the popular belief that the trade balance can be altered by appreciating China’s currency, China’s trade surplus did not change despite the yuan’s appreciation of 20 percent during 2005-2008. Because trade balance is a mirror image of differences between a country’s savings and investment, a revaluation of the yuan would have a minor effect on trade compared to a change in China’s savings and investment structure.