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

Mr. Peston’s 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 China’s huge consumption potential will play an important role in the world’s present and future economic patterns.

In ignoring the factor of domestic consumption in China, the documentary is missing the advantages of China’s 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 China’s 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 China’s transition from an investment-driven economy to one that is propelled by consumption will decide the future of China’s 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 China’s economy, then the debt borrowed from China’s banks will be unsustainable. However, this opinion doesn’t 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 China’s 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 doesn’t lie in investment alone; the issue China faces is whether or not investment and consumption can achieve a dynamic equilibrium.

China’s 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 country’s 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 China’s 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.

KUANG XIANMING is director of the Research Center for Economy at Hainan’s China Institute for Reform and Development.