Is the world ready for Beijing's economic new normal?
- By Stephen S. Roach<p> Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of The Next Asia. His forthcoming book, Unbalanced: The Codependency of America and China, will be published Jan. 2014. </p>
The world is having a hard time accepting a slowing Chinese economy. Hooked on 30 years of 10 percent average gains in Chinese gross domestic product (GDP), growth-starved economies around the world are desperate for more of the same. But it isn’t going to happen.
Some six years ago, China’s then premier, Wen Jiabao, posed a paradox that came to be called the "Four Uns": though China’s economy looked strong on the surface, Wen argued it was increasingly "unstable, unbalanced, uncoordinated, and ultimately unsustainable." The debate those remarks sparked is now over, and a new Chinese growth model is at hand. China’s 12th Five-Year Plan, enacted in 2011, calls for a shift to an economy driven increasingly by domestic consumption, rather than one driven largely by exports and investments.
China’s new generation of leaders, President Xi Jinping and Premier Li Keqiang, are now focusing on implementing this daunting structural transformation. During the U.S.-China Strategic and Economic Dialogue on July 10-11, an annual meeting between high-ranking officials from the two countries, the opportunities and the risks of this rebalancing will feature prominently in the discussions.
For its part, China’s new leadership is committed to rebalancing. With GDP growth slowing to 7.7 percent in the first quarter of 2013, and data for April and May pointing to more of the same, previous Chinese leaders would have quickly announced a new infrastructure program or other stimulus policies to spur the economy. By not introducing new spending initiatives, the government of Xi and Li has sent a strong signal that Beijing is now willing to accept slower growth.
That conclusion was reinforced by last month’s liquidity squeeze in the overnight bank funding markets. Because the People’s Bank of China, the country’s central bank, didn’t intervene as it normally does in such circumstances, the interbank lending rate shot up on June 20, reaching a record of 13.4 percent — more than four times the average over the last 18 months (it dropped back a few days later.) This lack of intervention sent a strong signal to banks, especially China’s "shadow banks," that the days of risky and undisciplined lending must end.
The message from China’s fiscal and monetary authorities is clear: the days of open-ended hyper growth are over. At the same time, Xi has been calling for a "mass line" education campaign aimed at addressing problems arising from the "four winds" of formalism, bureaucracy, hedonism, and extravagance. Though cryptic, his message appears to underscore a new sense of political discipline, to complement the discipline of China’s fiscal and monetary policies. The Chinese Communist Party, Xi seems to be saying, must realign itself with the core interests of the people and their requisite economic fundamentals.
China is at an important juncture in its development journey. It’s determined to move away from the quantity dimension of growth to a new focus on the quality of economic development. This is not only about a downshift in GDP growth: it is also a critical shift toward the long dormant Chinese consumer, opening up one of the largest consumer markets in the world to anemically growing Western countries.
This is especially important for the United States, which continues to languish in a weak recovery with unacceptably high unemployment. Washington needs to push hard for free and open access to these markets, an issue that will undoubtedly be high on the agenda for the Strategic and Economic Dialogue.
While China’s previous administration recognized the importance of structural change, they made disappointingly little progress. Slower growth doesn’t work for China unless its economy undergoes a fundamental transformation. The new policy discipline of Xi and Li is important because it effectively ups the ante on China’s rebalancing agenda — making implementation of the 12th Five-Year Plan all the more urgent.
For consumption to play its proper role in China’s economy, three sets of reforms are essential: services-led job creation, urbanization, and a well-funded social safety net. The objective is to boost the consumption of Chinese citizens from its current share of 35 percent of GDP (by contrast, it is 71 percent in the United States) to 40 percent over the next three to five years, and to more than 45 percent by 2023.
The emphasis on services and urbanization should help increase personal income — the mainstay of consumer demand for any economy. But a services-led China also holds the key to a sustainable slowdown in GDP growth, because services require roughly 30 percent more workers per unit of Chinese output than manufacturing and construction. In other words, China can accomplish the same labor absorption (i.e., employment of poor rural workers) with a services-led economy growing at 7 percent as with a manufacturing- and construction-led economy growing at 10 percent. With services comprising only about 43 percent of the economy — the lowest share of any major economy in the world — there is plenty of room for this sector to grow.
Urbanization is also an essential part of China’s consumer-led transformation. Urban Chinese workers have per capita incomes of slightly more than three times their counterparts in rural areas. China’s urban population reached 52.6 percent of the total population in 2012, up from 20 percent in 1981 and is projected to rise to 70 percent by 2030. As long as job creation, especially in the services industry, accompanies urbanization, a sharp boost in labor income generation is likely. But without a better safety net, Chinese families will keep saving too much and spending too little. The nation’s vastly underfunded retirement system is a key aspect of this problem. China’s focus has been on expanding the number of citizens enrolled in the retirement and healthcare plans; emphasis now needs to shift to providing more funding for the plans.
While this is a daunting agenda, the new policy discipline of the Xi-Li administration raises the probability of a successful consumer-led rebalancing. If it does succeed, there are three things the world should expect from China: First, Chinese GDP growth will likely hover at 7 or 8 percent over the next decade. The labor intensity of services suggests China can grow in this range and still generate enough jobs and income to maintain social stability.
Second, services-led growth means a move away from resource-intensive manufacturing. While this may pose problems for countries in China’s resource supply chain — especially Australia, Brazil, Canada, and Russia — it offers the possibility of reduced environmental degradation and pollution, making for a cleaner and greener Chinese GDP.
Third, the emergence of the Chinese consumer is a potential windfall for the developed world. That’s especially true in services, where China has little experience or expertise. China’s embryonic services sector could increase from $3.5 trillion in 2012 to $15.9 trillion by 2025. Increasingly tradable in a connected world, this $12.4 trillion surge could translate into a $4 trillion to $6 trillion bonanza for foreign companies.
The transition won’t be seamless, nor will it happen overnight. But like most of its accomplishments in the post-Mao era, China’s development clock runs at roughly four times the speed of others. The Strategic and Economic Dialogue must recognize the opportunities arising from the coming transition to slower, better balanced, and more sustainable Chinese growth.