The China Conundrum

IMGXYZ3550IMGZYXNo country generates as many different economic forecasts and interpretations than China. Some analysts claim that China is an unstoppable economic power, whose influence in the global economy will soon overtake that of the United States, while others warn that China’s economic growth is unstable, unbalanced, and unsustainable.

Carnegie’s Yukon Huang discussed the future of China’s economy and imbalanced growth with foreign media and correspondents from the Foreign Correspondents Club of China.

Location and Growth Rate

• Unbalanced Reform: Huang asserted that Deng Xiaoping can be seen as an “unbalanced” reformer, given his decision to direct industry, capital and investment toward the coastal areas. The world’s major electronics and communications firms, clothing manufacturers, and technology companies are all located in major coastal cities like Shanghai, Xiamen, Guangzhou, and Shenzhen. In contrast, the production of raw materials for domestic consumption is more evenly distributed across the country. 
   
• Transfer of Resources: The development of infrastructure followed the path of capital, with the highest density of highways concentrated in China’s coastal provinces, Huang explained. The original goal was to bring raw materials and labor from China’ interior, but over time the transport network has been moving inland. 
   
• Competitive and Productive:  The specialization between the location of global manufacturing industries and domestic raw material producing industries has helped make China’s economy so competitive and productive, argued Huang. Between 1980 and 2005, China’s labor productivity was substantially higher than any other country. 
   
• Convergence: The apparent imbalance at the start of Deng’s reforms is now evening out, Huang said. In the 1990s, China’s east coast had the highest growth rates as a percentage of GDP. Since 2009, however, the western provinces are leading the way.

Consumption

• Misinterpreting Statistics: China’s consumption as a share of GDP is only 35 percent, lower than any other major economy, Huang said. On the other hand, the World Bank cites China’s growth in  per-capita consumption as the highest of any major economy. This apparent discrepancy indicates how easy it is to come to different conclusions about China’s economy depending on the data used, Huang explained. 
   
• Income as a Share of GDP: The decline in consumption as a share of GDP is due in part to a decline in personal income as a share of GDP, Huang said. However, Huang explained that the decline in personal income as a share of GDP does not necessarily imply that the Chinese economy is headed in the wrong direction or that household income is not increasing as it is at record rates. This decline is due to increasing urbanization and greater numbers of people being employed in more profitable and productive secondary and tertiary industries.
   
• Saving as a Share of GDP: An increase in the savings rate as a share of GDP is another factor pulling the consumption rate as a share of GDP down, Huang said. This is also likely caused by increasing urbanization and the phenomenon of migrant workers. China’s social security system does not provide for residents living in a city without a hukou (household registration). According to several surveys, migrant workers save between 30 and 40 percent of their income (almost twice the rate of established residents) and account for between 40 and 50 percent of China’s urban labor force. Because China’s trade surplus is the result of its savings rate increasing faster than its investment rate, Huang suggested that a reform of the hukou system might allow China to become a trade deficit country, since migrant savings rates would decline.

Inequality

• Spatial Aspect: China is marked by unequal income distribution, Huang said, with a Gini coefficient of only 0.47. Disparities are primarily found along regional lines, between China’s coastal and inland provinces and its rural and urban areas. Huang made it clear that efforts to resolve this inequality must be addressed with this spatial characteristic in mind. 
   
• Public  Expenditures: According to World Bank estimates, China’s public  expenditures are very low, 25.7 percent of GDP compared to the OECD countries’ average of 41.6 percent. This is unusual for a nominally socialist country, Huang said. He suggested that China’s banking system makes up for this gap in government funding, which further exacerbates inequalities since banks typically seek out profit making opportunities and try to raise capital; there is little benefit for them in supporting social welfare programs. 

Impact for U.S. and Chinese Policies

• Reframing the Debate: Carnegie’s Paul Haenle raised the question about how these misinterpretations about China’s economy should be addressed by U.S. policymakers. Huang stated that U.S. policymakers should reframe the debate in terms of China’s social welfare: reforming the hukou system would cause savings rates to rise much slower than its rate of investment as a percentage of GDP. The end result would be China’s transformation from a trade surplus to a trade deficit country. 
   
• Learning from South Korea: In reforming the hukou system, Huang suggested that China should learn from South Korea. During the peak of South Korea’s industrialization, 49 percent of the population moved across provincial boundaries. The South Korean government facilitated this movement by providing roughly the same quality of social services regardless of where the people were located, which allowed greater rural to urban migration.  This also benefited those who did not migrate since they had more resources to work with.