Analysis: Running with the bulls: a rosy view of China in 2020

By Alan Wheatley, China Economics Editor

BEIJING (BestGrowthStock) – By 2020, China is entering its fifth decade of sustained growth. The trade surpluses that used to strain the global economy have shrunk into insignificance as the Middle Kingdom’s consumption steadily grows.

A productive workforce is much better paid, lancing the boil of a widening income gap. Purchasing power has surged thanks to a stronger yuan. Beijing is a leader in improving energy efficiency.

Let’s leave aside worries of a property bubble and a new crop of bad loans. Forget the specter of protectionism.

After investors’ bearish reaction last week to a moderate slowdown in economic growth in July, it’s time to make again the unabashed long-term bullish case for China.

Ross Garnaut, an economics professor at the Australian National University in Canberra, is among those confident that China is about to enter an era of higher-quality growth, not least because demographics dictate that unlimited supplies of cheap labor will soon be a thing of the past.

First and foremost, there will be large and continuing increases in real wages and in the wage share of income, Garnaut wrote in the East Asia Forum, an online newsletter.

This is critical. Pay has risen briskly in China, but profits and the government’s share of national income have risen even faster, squeezing workers.

“The powerful tendency since the 1980s toward increased inequality in income distribution is likely to be reversed,” Garnaut wrote.

In this virtuous circle, spending will rise and the national savings rate will fall, thus reducing China’s external surpluses and easing tensions with Beijing’s trading partners.

Garnaut said there was no basis for assuming that a shrinking workforce, which is set to contract from around 2015, would dent the productivity gains; the economy could keep expanding at close to the near double-digit average of the past 30 years of market reform.

That headlong growth catapulted China past Japan last quarter to become the world’s second-largest economy, according to an estimate on Monday by Japan’s Cabinet Office.

Urbanization, development of the interior and investment in a low-carbon economy will sustain growth at more than 9 percent in the coming decade, according to Li Daokui, an economics professor at Tsinghua University in Beijing.

China, Lie said, is set to enjoy a “golden period.”


If he’s right, the consequences for the rest of the world will be far-reaching.

International Monetary Fund economists Vivek Arora and Athanasios Vamvakidis calculate that, over the last two decades, a percentage point extra Chinese growth is correlated with an average rise of 0.5 percentage point in other countries’ growth.

“Moreover, while China’s spillovers initially only mattered for neighboring countries, the importance of distance has diminished over time,” they wrote in a working paper.

Garnaut reckons even richer vistas could open up for the likes of India as China’s comparative advantage shifts to technologically complex goods from simple manufactures.

Think high-speed trains, not plastic toys.

“This will expand opportunities for export-oriented growth in poorer labor surplus economies, at a rate and on a scale that could be transformative for the prospects for the densely populated parts of the developing world,” he said.

Like Garnaut, Amar Gill, a researcher at brokerage CLSA, says the share of consumption in China’s GDP can only rise.

The increase in the dollar value of China’s consumption has exceeded that of the United States since 2007. Yet Chinese households consume less than 36 percent of GDP, the lowest rate among major economies.

“This is a source of growth that can be sustained for the next 5-10 years,” Gill said last week.

So if China’s GDP grows at 8 percent or 9 percent a year, real consumption could expand by 9 or 9.5 percent annually.

“Beijing can see that and thus they are now allowing income growth of 15-20 percent a year to shift a bigger part of GDP into the hands of households and also increasing the buying power of the consumer through the appreciation of the RMB,” Gill said.

He believes the yuan, also called the renminbi (RMB), could rise to 5 per dollar by 2015. It now trades around 6.8.


It is the inflation-adjusted exchange rate, together with the pace of real GDP growth, that dictates how quickly dollar incomes in developing countries catch up with those of rich economies.

If China does indeed have little surplus labor left to move off the land, the real exchange rate could rise rapidly as wages sprint ahead, pushing up unit labor costs in services, where the productivity of jobs such as hairdressers and waiters is lower than in manufacturing.

Louis Kuijs, a World Bank economist in Beijing, has doubts whether China’s labor market has reached a turning point. This makes it tough to forecast the currency. So Kuijs, in a recent paper, maps two paths.

One assumes a rise in the yuan’s real, trade-weighted exchange rate of 0.8 percent a year; the other assumes a 3 percent rise, in line with the experience of Japan from 1965-1990 and South Korea from 1970-1996.

What’s striking is how little difference this makes. Under the slow appreciation scenario, China overtakes the United States as the world’s biggest economy in 2029; if the exchange rate rises faster, it does so by 2023.

Garnaut says China’s real exchange rate will rise rapidly come what may — either via nominal appreciation or inflation.

“People in China and abroad who focus on conventional measures of output will find that China catches up with the world’s most productive economies in output per person — and with the United States in total output — much more quickly than they had been expecting from extrapolation of differentials in national growth rates,” he said.

(Editing by Mathew Veedon)

Analysis: Running with the bulls: a rosy view of China in 2020