It has long been common lore that China has to maintain GDP growth of something like 7% in order to avoid social unrest, but a fascinating article in the FT by Michael Pettis debunks this theory and suggests that, in fact, we are looking at the wrong measure altogether when we focus on GDP alone.
We should, for a number of reasons, be focusing on household consumption when we consider social satisfaction with the regime’s management of the economy.
Pettis helps out with a few basic measures.
For a start, household consumption, at an astonishingly low 35% of GDP, is just over half the global average.
Attempts to engineer a rebalancing of the economy from exports to consumption that lifts consumption over the next 10 years to, say, 50% – which will still leave it with the lowest consumption share of any large economy in the world – would require consumption growth to exceed GDP growth by close to 4 percentage points every year.
So an average annual GDP growth rate of 6% or 7% requires average growth in consumption of nearly 10-11% for a decade for China to rebalance meaningfully.
Why are China’s Consumption Rates So Low?
The answer to why consumption rates are so low is not hard to find. For decades, Beijing has pursued supported growth by adopting policies to transfer resources from the household sector to the state sector in the form of low wages and near zero deposit rates. The policy has been phenomenally successful from a GDP perspective, but now as Beijing aims to steer the economy to a more sustainable internal consumption model, it poses enormous challenges.
For household income to rise at 4% above GDP levels, national GDP has to fall further; probably, Pettis suggests, to a more normal 3-4% level. In tandem with that, salaries will have to rise and so will interest rates on private deposits – moves that would put enormous pressure on export industries that rely on low wages and cheap loans.
But as we have pointed out in recent articles, China’s export competitiveness has as much or more to do with subsidies, cheap land, tax breaks and low power costs as it does with labor rates. Nevertheless, it would hasten the migration of Chinese manufacturing up the value chain.
Looking at it from this point of view, we can see China’s rebalancing of its economy in a 10-year timeframe, with gradually falling GDP, a rising share of household income, falling fixed asset investment (zero, Pettis suggests), rising wages and consumption and a reduction in China’s role as the workshop of the world as it gradually becomes if not the world’s largest consumer – a position long held by the US – then at least sharing that role as buyer rather than seller to the world.
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