By Brian Wang
Predictions of China’s future economy have varied wildly.
Among the many popular beliefs are:
* China’s high debt levels will inevitably lead to financial crisis but its debt as a share of GDP places it around the middle of major economies
* Corruption has negative consequences for China’s growth but deepening corruption has facilitated rather than impeded growth
* It is impossible for U.S. firms to compete with China because its wages are so low but China’s wages have increased fivefold since the mid-1990s
* American companies invest a lot in China, which is a drain on jobs in the United States but less than two percent of America’s foreign investment over the past decade actually went to China.
Inevitable unbalance growth
Unbalanced growth is an inevitable but unintended consequence of a largely successful long-term development process. A decline in consumption as a share of GDP and a commensurate increase in investment actually comes from the movement of migrant workers from labor-intensive rural activities to more capital-intensive industrial jobs in cities. In the process, the share of consumption to GDP automatically declines even though consumption per person or household increases. In labor-surplus countries like China, farmers consume most of what they produce; thus, the share of consumption relative to agriculture output is high. When the farmer moves to an urban-based industrial job, such as assembling computers, he is paid a wage that is several multiples of what he was previously earning in agriculture; thus, his personal consumption increases considerably. But labor costs (and thus personal consumption) as a share of the value of an industrial product is relatively small compared with the costs of the components and the factory. Thus, the steady transfer of labor from agriculture to industry leads to a decline in the share of consumption to GDP but an increase in consumption per worker. Unbalanced growth has thus led to a rise in household living standards and China becoming a major manufacturing and trading power—much as it once did for Japan and South Korea and, a century before that, in the United States.
Debt levels and sustainability of housing
A decade ago, China did not have a significant private property market. Once that market was created, credit surged into establishing market-based values for land—whose value was previously hidden in a socialist system. The fivefold increase in property prices over the past decade is the consequence.
The question now is whether current asset prices are sustainable. If they are not, a debt crisis is plausible. On that score, housing inventory has declined in recent years and affordability has improved. Many analysts have compared China’s housing prices with other major cities to get a sense of whether they are too high. But usually such comparisons are with much richer cities such as Hong Kong, Singapore, and Tokyo. Few realized that compared to India, prices in China’s megacities are actually much lower.
China’s debt problem is not so much a sign of typical banking problems but rather the consequence of a weak fiscal system.
Rather than worrying about China’s unbalanced growth model, the focus should be on persuading China to grant its rural-to-urban migrant workers full access to the social and economic services accorded to established urban residents. Doing so is justified for reasons of equity, but it would also spur growth in personal consumption and help moderate China’s trade surpluses, thus easing global trade tensions.