What Are the Real Problems of China's Economic Growth?
By Kuang Xianming
China is the world's second-largest economy, and how its economic growth progresses will inevitably influence how the world does. The outside world has followed closely the sustainability of China's economic growth, with such interest the basis for the BBC documentary "How China Fooled the World". The documentary is centered around the problem that China's economic growth has been driven by vast amounts of credit from the banking sector over the past few years; however, the documentary also comes to the arbitrary conclusion that this development mode is not sustainable. The reasons why the filmmakers arrived at such a conclusion was because they ignored the increasing domestic consumption demand and China's structural reforms, choosing to focus solely on the potential risks of such economic development, then exaggerating the risks. Although the documentary raised a number of valid concerns, its conclusion was wrong.
The China advantage
Over the past few years, China's economic development has demonstrated all the characteristics of growth driven by mounting investment. Former Chinese Premier Wen Jiabao stated as much in 2007 when he determined that the growth model was "unstable, unbalanced, uncoordinated and unsustainable". Therefore, the need to transform China's economic development model was emphasized in the 12th Five-Year Program (2011-2015), with one of the key missions being the expansion of domestic consumption demand.
Each country has its own economic risks, but the likelihood of these risks evolving into a crisis or crises depends on whether the economy has advantages by which to boost its growth. Compared with many already-developed Western countries, China's biggest advantage lies in its expansion of domestic consumption demand and the upgrade of the consumption structure.
First of all, consumption and personal spending in China is on the up and up, with expenditure from Chinese citizens increasing to 19.04 trillion yuan ($3.1 trillion) in 2012 from 175.9 billion yuan ($28.6 billion) in 1978. In addition, the increase in total retail sales exceeded 2 trillion yuan ($0.32 trillion) in 2013, equal to a year of total sales in the mid-1990s in China.
Furthermore, the consumption structure of China's urban and rural residents had advanced from the desire for life necessities to durable consumption goods to consumption of services. One way to examine this progress is by using the Engel coefficient, a major indicator of the living standards of a country that measures the proportion of income spent on food against the actual expenditure on food. In 1978 China, the Engel coefficient value for urban residents was 57.5 percent and 67.7 percent for rural citizens. By 2013, the Engel coefficient for urban citizens had decreased to 35 percent, with 37.7 percent the figure for rural residents (a lower number indicates a higher standard of living).
Finally, from 1978 to 2011, the average annual consumption growth rates of the U.S., Japan and the European Union were 6.3 percent, 5.9 percent and 5.9 percent respectively. In comparison, the average annual consumption growth rate in China was 11.5 percent over the same period, demonstrating a reduced consumption gap between China and the rest.
We cannot say that this documentary ignores China's domestic consumption completely. Robert Peston, the film's presenter, visited a night market in Wuhan and saw for himself consumption at work. Yet he did not analyze further the potential of domestic consumption demand in China; he did not address the strong purchasing power of Chinese citizens during Singles' Day on November 11 each year that online retailers in China regard as a battlefield, a battlefield that can result in astronomical single-day revenues.
Mr. Peston not seeing this, however, does not mean others have ignored the 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.
If the documentary ignores the factor of domestic consumption in China, it is not seeing the advantages of China's economic growth. The film concentrates on the risks alone, so naturally the film makes a pessimistic and biased conclusion.
