Todays feverish hand-wringing reflects a confluence of worriesespecially concerns about inflation, excess investment, soaring wages and bad bank loans. Prominent academics warn that China could fall victim to the dreaded middle-income trap, which has derailed many a developing nation.
There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem. But they stem largely from misplaced generalisations. Here are ten reasons why it doesnt pay to diagnose the Chinese economy by drawing inferences from the experiences of others:
Strategy. Since 1953, China has framed its macro objectives in the context of five-year plans, with clearly defined targets and policy initiatives designed to hit those targets. The recently enacted 12th Five-Year Plan could well be a strategic turning pointushering in a shift from the highly successful producer model of the past 30 years to a flourishing consumer society.
Commitment. Seared by memories of turmoil, reinforced by the Cultural Revolution of the 1970s, Chinas leadership places the highest priority on stability. Such a commitment served China extremely well in avoiding collateral damage from the crisis of 2008-09. It stands to play an equally important role in driving the fight against inflation, asset bubbles and deteriorating loan quality.
Wherewithal to deliver. Chinas commitment to stability has teeth. More than 30 years of reform have unlocked its economic dynamism. Enterprise and financial-market reforms have been key, and many more reforms are coming. Moreover, China has shown itself to be a good learner from past crises, and shifts course when necessary.
Saving. A domestic saving rate in excess of 50% has served China well. It funded the investment imperatives of economic development and boosted the cushion of foreign-exchange reserves that has shielded China from external shocks. China now stands ready to absorb some of that surplus saving to promote a shift towards internal demand.
Rural-urban migration. Over the past 30 years, the urban share of the Chinese population has risen from 20% to 46%. According to OECD estimates, another 316 million people should move from the countryside to Chinas cities over the next 20 years. Such an unprecedented wave of urbanisation provides solid support for infrastructure investment and commercial and residential construction activity. Fears of excess investment and ghost cities fixate on the supply side, without giving due weight to burgeoning demand.
Low-hanging fruitConsumption. Private consumption accounts for only about 37% of Chinas GDPthe smallest share of any major economy. By focusing on job creation, wage increases and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power. That could lead to as much as a five-percentage-point increase in Chinas consumption share by 2015.
Low-hanging fruitServices. Services account for just 43% of Chinese GDPwell below global norms. Services are an important piece of Chinas pro-consumption strategyespecially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure. Over the next five years, the services share of Chinese GDP could rise above the currently targeted four-percentage-point increase. This is a labour-intensive, resource-efficient, environmentally-friendly growth recipeprecisely what China needs in the next phase of its development.
Foreign direct investment. Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the worlds most populous market. Such investments provide China with access to modern technologies and management systemsa catalyst to economic development. Chinas upcoming pro-consumption rebalancing implies a potential shift in FDIaway from manufacturing towards servicesthat could propel growth further.
Education. China has taken enormous strides in building human capital. The adult literacy rate is now almost 95%, and secondary school enrolment rates are up to 80%. Shanghais 15-year-old students were recently ranked first globally in maths and reading as per the standardised PISA metric. Chinese universities now graduate more than 1.5 million engineers and scientists annually. The country is well on its way to a knowledge-based economy.
Innovation. In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the US. China is fourth and rising in terms of international patent applications. At the same time, China is targeting a research-and-development share of GDP of 2.2% by 2015double the ratio in 2002. This fits with the 12th Five-Year Plans new focus on innovation-based strategic emerging industriesenergy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels. Currently, these seven industries account for 3% of Chinese GDP; the government is targeting a 15% share by 2020, a significant move up the value chain.
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself. Todays cottage industry of China doubters is a case in point. Yes, by our standards, Chinas imbalances are unstable and unsustainable. Chinese Premier Wen Jiabao has, in fact, gone public with a similar critique.
But thats why China is so different. It actually takes these concerns seriously. Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints. Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy. This is not a time to bet against China.
The author, a member of the faculty at Yale University, is non-executive chairman of Morgan Stanley Asia and author of The Next Asia.
Copyright: Project Syndicate, 2011
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