In praise of China’s new economic normal

BY YAO YANG

SEPTEMBER 26

China’s economy is, at long last, undergoing a rebalancing, with growth rates having declined from more than 10 per cent before 2008 to roughly 7.5 per cent today.

Is this the nation’s “new normal”, or should Beijing anticipate even slower growth in the coming decade?

China’s rebalancing is apparent, first and foremost, in the export sector. Export growth has slowed from its 2001 to 2008 average of 29 per cent annually to below 10 per cent, making foreign demand a far less critical engine of growth.

Moreover, manufacturing employment and output, as a share of the total, began to decline last year. In fact, in the first half of this year, services accounted for more than half of total economic growth.

It is no surprise then that China’s current-account surplus has shrunk rapidly, from its 2007 peak of more than 10 per cent of gross domestic product to about 2 per cent of GDP today.



This rebalancing has helped improve China’s income distribution. Indeed, in recent years, labour’s share of national income has been on the rise — a direct reflection of the decline in manufacturing and growth in services.

That has meant greater regional balance too. The coastal provinces, which produce more than 85 per cent of the nation’s exports, are experiencing the most pronounced slowdown, while inland provinces have maintained relatively high growth rates.

As a result, China’s Gini coefficient (a 100-point index of inequality, in which zero signifies absolute equality and one absolute inequality) fell to 0.50 in 2012 from 0.52 in 2010.

FORCES driving FUTURE GROWTH

Two principal factors are driving this shift. The first is the decline in global demand in the wake of the 2008 financial crisis, which has forced China to adjust its growth model sooner than anticipated.

The second is the nation’s ongoing demographic transformation. The share of working-age people (16 to 65 years old) in the total population has been declining since its peak of 72 per cent in 2010. And the absolute number of working-age people has been falling since 2012.

At the same time, China is undergoing rapid urbanisation, with about 200 million people having left the agricultural sector from 2001 to 2008 to seek urban manufacturing jobs.

More recently, however, the pace of migration has slowed substantially, with rural areas retaining 35 per cent of China’s total labour force.

All of this implies lower growth rates for China — although perhaps not as low as the 6-7 per cent that economists such as Liu Shijing and Cai Fang are predicting for the next decade.

In fact, relying on China’s past growth record to predict future performance is inherently problematic, owing not only to important shifts in the labour force, but also to the fact that the speed and scale of China’s pre-2008 growth were unprecedented.

For starters, it is likely the contribution to output growth of the rising ratio of working-age people before 2010 was overestimated. That makes the subsequent fall in the ratio an inaccurate measure with which to determine the negative impact on economic performance. Moreover, this approach neglectsthe educational dividends China will enjoy over the next 20 years, as the younger generation replaces older workers.

As it stands, the rate of return-adjusted educational attainment for Chinese aged 50 to 60 is half that of those aged 20 to 25. In other words, young workers will be twice as productive as those entering retirement.

Indeed, the level of educational attainment in China continues to improve. By 2020, the share of those aged 18 to 22 who are pursuing a college education will reach 40 per cent from 32 per cent today.

This improvement in human capital is bound to offset, to some extent, the net loss of labour.

In addition, China’s low retirement age — 50 for women and 60 for men — provides policymakers with considerable room for manoeuvre.

Increasing the retirement age by only half a year for each of the next 10 years would more than compensate for the annual decline in the labour force, which is projected to be 2.5 million workers during this period.

Other trends are boosting China’s prospects further. Although investment is likely to decline as a share of GDP, it would probably take a decade for it to dip below 40 per cent — still robust by international standards. Meanwhile, the capital stock can maintain a reasonable growth rate.

Finally, China’s capacity for innovation is improving steadily, owing to rapidly increasing human capital and rising investment in research and development.

By next year, Chinese R&D expenditure, at 2.2 per cent of GDP, will be closing in on the levels of advanced countries.

Based on these trends — and assuming a constant labour-participation rate — China’s potential growth rate over the next decade is likely to hover around 6.9-7.6 per cent, averaging 7.27 per cent.

This may be much lower than the 9.4 per cent average growth rate from 1988 to last year, but is more than adequate by global standards.

If this is China’s “new normal,” it would still be the envy of the rest of the world.

PROJECT SYNDICATE

ABOUT THE AUTHOR:
Yao Yang is Dean of the National School of Development and Director of the China Center for Economic Research at Peking University.

[A "rebuttal" of the various "China is declining" and "China is Doomed"articles.

A growing China is a stable China. It is something to hope for. But Hope is not a strategy.]