The last reason China’s screwed? Absolute population. (Read the Top 3 Reasons in Part One here.)
The number of Chinese is likely to peak at below 1.4 billion sometime after 2020. Today, there are four Chinese for every American. By the end of the century, that ratio could fall to between 1.9 and 1.25, according to Beardson, with profound implications for the relative weight of the economy in the world.
As China’s recent mini-stimulus shows, while paying lip service to transforming the economy from investment-led to consumption-led, the reality is “old habits die hard.”
Beijing’s stimulus is right out the top drawer of traditional infrastructure-focused investment. In addition, state-owned enterprises account for a third of GDP, yet suck up 90% of credit, and until the state loosens control of interest rates and lending, that won’t change. Encouragingly the recent plenum made specific mention of such intent, even if it did not lay out any timetable.
Moves to a consumption-led model and off a reliance on exports are facing major challenges, according to Huang Yiping of Barclays Capital as quoted in the FT. He notes consumption fell from about 45% of gross domestic product in the late 1990s to a low 33% last year; meanwhile, investment has hit a global high of 50% of GDP. “When reforms began 30 years ago, the investment rate was around 25% of GDP and the economy grew at around 10% a year, but now we are investing half of GDP for the same rate of growth; that tells you something about capital efficiency.”
The economy has moved from Just Add People to Just Add Capital, the paper observes, creating over-(and unproductive) investment across the economy that may never be fully used. Nor has the economics of local government been weaned off the property market.
As Reuters points out, Beijing prices are the steepest in the country. A 70-square-meter home (750 sq ft) costs 20 times annual household disposable income, the IMF stated in a 2011 report, four times higher than in Britain and double that of Japan. Shanghai’s price-to-income ratio is around 14 times.
While these are extremes, the problem is exacerbated across the country by local governments. Selling land is a major source of income for local governments so they have an incentive to keep prices high, while speculation fueled by ready cash, in the absence of alternatives for investments, makes the problem worse than it needs to be and encourages yet more construction.
Unfortunately, the plenum closed with some disturbing announcements.
The party made clear the state would continue to maintain an iron control of the Chinese economy. The closing document seemed to rule out any serious effort to reduce the power of state companies in sectors such as banking, energy, telecommunications and transportation.
While mention of currency and interest rate liberalization, and loosening of restrictions on rural residents’ ability to settle in cities, was welcomed, the wording was vague and is widely seen as only moderately ambitious rather than the radical vision many had hoped for.
Let’s hope Beijing is painting a business-as-usual image to the world while planning for transformational changes behind the scenes, because business as usual has run its course.