Future of China’s Economic Rise is Unpredictable

IMGXYZ3899IMGZYXA number of crucial questions face China’s economy and are prompting fierce debate among Chinese economists and international observers alike. Is China’s unbalanced growth a strength or vulnerability? Can China moderate its trade surplus to reduce global trade tensions? Can China move up the innovation ladder and will this create more tension?

To address these questions, the American Chamber of Commerce in China and the Carnegie-Tsinghua Center for Global Policy hosted a joint roundtable featuring Carnegie’s Yukon Huang. Carnegie-Tsinghua’s Paul Haenle gave the opening remarks.

China’s Unbalanced Growth

• Concentration of Growth in the East: Huang explained how Deng Xiaoping’s reform policies in the 1980s concentrated development in the eastern and southern coastal regions. This strategy was aimed at attracting investment by making the best use of China’s limited resources and infrastructure.
   
• Fiscal Limitations for China: Fiscal resources in the 1980s and 90s were virtually non-existent, continued Huang. In China, the alternative of raising taxes or spending provincial funds would be regressive. He added that the “financial repression” from controlled interest rates and limited investment options diverted savings from households to banks.
   
• Migration to the Coast: Huang explained that this unbalanced development resulted in massive migrations from western and central China to the eastern coast’s factories. This rapid industrial development led to an increase in productivity, household income, and consumption, but also created large income disparities between eastern and western provinces, as well as environmental degradation and political tensions.

Household Consumption

• Unbalanced Consumption: Since 2001, the relationship between investment and private consumption has been inverted, as investment increased and private consumption decreased. Household consumption as a percentage of GDP has also been steadily decreasing since the 1980s.
   
• Not as Bad as it Seems: Huang asserted that although most economists see the  decline in Chinese household consumption as a negative consequence of the country’s unbalanced growth, the causes of this decline are in fact positive for China overall.
   
• Growth of Consumption Versus Growth of GDP: Because China’s GDP is growing at a much faster rate than consumption, calculating household consumption as a percentage of the GDP can give a false impression of just how much people are consuming. In fact, China leads other developing nations in consumption growth per capita, Huang added.

From a Manufacturing to Innovation Based Economy

• Manufacturing: In the 1990s, China’s manufacturing and processing based economy resulted in an escalating trade surplus, as more and more foreign enterprises transferred their processing and manufacturing to China.
   
• Renminbi Appreciation: Huang explained that the appreciation of the Chinese renminbi over the last several years has adversely affected firms reliant on China’s low manufacturing prices.
   
• Increased Emphasis on Innovation: To compete with other, more advanced economies such as the United States and counter the drop in manufacturing, China is placing greater emphasis on green technology and human capital development.