What Are the Real Problems of China’s Economic Growth?

By+KUANG+XIANMING

CHINA is the worlds second-largest economy， and how its economic growth progresses will inevitably influence that globally. The outside world has followed closely the sustainability of Chinas economic growth. Such interest was the basis for the BBC documentary How China Fooled the World. The documentary is centered around Chinas economic growth having been driven by vast amounts of credit from the banking sector over the past few years. However， it comes to the arbitrary conclusion that this development mode is not sustainable. By ignoring the increasing domestic consumption demand and Chinas structural reforms， and choosing to focus solely on and exaggerate the potential risks of such economic development， the filmmakers， while raising a number of valid concerns， have made a miscalculated summation.

The China Advantage

Over the past few years， Chinas economic development has demonstrated all the characteristics of growth driven by mounting investment. Former Chinese Premier Wen Jiabao stated as much in 2007 when he determined that the growth model was “unstable， unbalanced， uncoordinated， and unsustainable.” Therefore， the need to transform Chinas economic development model was emphasized in the 12th Five-year Plan （2011-2015）， one of the key missions being the expansion of domestic consumption demand.

Each country has its own economic risks， but the likelihood of these risks evolving into a crisis or crises depends on whether the economy has advantages through which to boost its growth. Compared with many developed Western countries， Chinas biggest advantage lies in its expansion of domestic consumption demand and the upgrade of the consumption structure.

First of all， consumption and personal spending in China is on the up， with expenditure from Chinese citizens increasing to RMB 19.04 trillion （US $3.1 trillion） in 2012 from RMB 175.9 billion （US $28.6 billion） in 1978. In addition， the increase in total retail sales exceeded RMB 2 trillion （US $0.32 trillion） in 2013， equal to a year of total sales in the mid-1990s in China.

Furthermore， the consumption structure of Chinas urban and rural residents has advanced from the desire for life necessities to durable consumption goods to consumption of services. One way to examine this progress is the Engel coefficient， a major indicator of the living standards of a country that measures the percentage of a households expenditure on food out of its total spending. In 1978， the Engel coefficient was 57.5 percent for urban residents and 67.7 percent for rural citizens. By 2013， the Engel coefficient for urban citizens had decreased to 35 percent， with 37.7 percent for rural residents （a lower figure indicates a higher standard of living）.

Finally， from 1978 to 2011， the average annual consumption growth of the U.S.， Japan and the European Union were 6.3 percent， 5.9 percent and 5.9 percent respectively. In comparison， the average annual consumption growth in China was 11.5 percent over the same period， demonstrating a reduced consumption gap between China and these regions.

We cannot say that this documentary ignored Chinas domestic consumption completely. Robert Peston， the films presenter， visited a night market in Wuhan and saw for himself consumption at work. Yet， he did not analyze further the potential of domestic consumption demand in China； he did not address the strong purchasing power of Chinese citizens during Singles Day on November 11 each year that online retailers in China regard as a battlefield – one that can result in astronomical single-day revenues， rather than casualties.

Mr. Pestons not seeing this， however， does not mean others have ignored the potential and importance of consumption demand in China. Management consulting firm McKinsey & Company evaluates the size of the consumption sector in China on a yearly basis， and every year it sees the potential as bullish. Moreover， Stephen Roach， former chairman of Morgan Stanley Asia， wrote in his latest book Unbalanced： The Codependency of America and China that Chinas huge consumption potential will play an important role in the worlds present and future economic patterns.

In ignoring the factor of domestic consumption in China， the documentary is missing the advantages of Chinas economic growth. It concentrates on the risks alone， so naturally， it reaches a pessimistic and biased conclusion.

Does China Need Further Investment？

The documentary said that Chinas investment-fueled growth model is unsustainable， and that the problem is indeed a massive one. For China and its 1.3 billion-strong population， growth of its economy is unsustainable if huge investment is introduced in a long-term manner. The level to which Chinas transition from an investmentdriven economy to one that is propelled by consumption will decide the future of Chinas economic growth in the mid- and long term.

The documentary also stated that total government investment in Wuhan over a few years is equal to that of one year in the United Kingdom. Meanwhile， problems such as industry over-capacity and high vacancy rates in the housing market also exist. The documentary held that if such huge investment numbers continue to fuel Chinas economy， then the debt borrowed from Chinas banks will be unsustainable. However， this opinion doesnt take into account the per capita capital stock of China. Research shows that in 2010， the total capital stock of China was RMB 93.3 trillion （US $13.8 trillion）， compared to US $44.7 trillion for the U.S. at the same time. The difference between China and the U.S. is greater if we calculate this figure on a per capita basis， with Chinas per capita capital stock at around US $10，000， less than 10 percent of that of the U.S. Even if China becomes a middle-income country， there is still a huge gap for China to bridge as the uneven economic development of various regions throughout the country remains an issue. Many fields in China， such as the public health sector， still need investment. As such， if China stops investing， there is little doubt that the results will be catastrophic.

The problem doesnt lie in investment alone； the issue China faces is whether or not investment and consumption can achieve a dynamic equilibrium.

Chinas Strength from Reform

Another reason why this documentary came to such an uninformed conclusion is that it ignored the strength that China gains from the transformation of its economic development model.

The proposed economic reforms are expected to make major breakthroughs because the measures the Chinese government has introduced over the past two years are unprecedented. Some of the major changes include more streamlined administration processes and the delegation of power to lower authorities； the breaking up of monopolies in such sectors as telecommunications and railways； and the establishment of a rent collection system from the countrys state-owned enterprises （SOEs） – all property owned by SOEs belongs to the general Chinese public， so the SOEs need to pay rent – and forcing the SOEs to submit a higher proportion of their profits to the country. In the non-public sectors of the economy， private capital is stimulated as some taxes and administrative fees have been reduced or exempted， with administrative approval reform accelerating. In addition， measures such as interest rate liberalization and the creation of privately-owned banks will lead to substantial changes in the financial sector. The government also plans to introduce price reforms in the energy （natural gas， coal） and natural resource（water） sectors in a gradual manner.

There is a consensus that Chinas reform is running together with risk. The documentary addressed acute problems in terms of excessive investment and mounting local government debt， issues that have been discussed and researched exhaustively. China is taking necessary steps to address them. If the documentary could not see this， then the conclusion it arrived at is neither objective nor complete.