China’s economy will probably grow by less than 8 per cent this year due to weak international demand and a sluggish domestic real estate market. Now the talk among China-watchers is that it is approaching a breaking point on its path of growth: the episode of high growth is over and the country is heading towards a path in the range of 6-7 per cent.
This mood is strong inside China. When Justin Yifu Lin, who just returned to China from his position as chief economist of the World Bank, announced China would keep growing by 8 per cent before 2030, the Chinese media dubbed his claim as “shooting a satellite” – a phrase referring to the widespread phenomenon of output exaggeration in the Great Leap-forward of 1958.
China’s slowdown is bad news for countries that are linked to its production chain. This includes East and Southeast Asian countries, regions that export to China, as well as China’s raw material and energy providers such as Australia, Brazil and the traditional oil producers. However, China’s slowdown can be good news for the developed world, especially the US. My colleague Yiping Huang and David Li, professor at Tsinghua University, both believe that the share of household consumption in GDP has increased in the past several years. China’s current account surplus also declined substantially to a mere 2.8 per cent of gross domestic product last year.
There are good reasons to believe China’s slowdown is permanent. The growth of China’s labour force has been falling since 2010 and by 2020 its stock will start to decline. In accordance, wages are increasing fast; China’s episode of cheap growth is approaching its end. On the international stage, the eurozone has fallen into recession again and the light of recovery is still deep in the tunnel. In the US, federal government debts will grow to more than 100 per cent of GDP even by the most conservative estimates.
However, an international comparison gives hope that China may be able to maintain an 8 per cent growth rate for at least another decade. China’s per-capita GDP is about the level of Japan’s in 1962 and the level of Korea’s in 1982. Both countries grew by 9.7 per cent in the following 10 years after they reached China’s per-capita income of today. A contrast is Brazil. It reached China’s current per-capita GDP in 1978 but then stagnated for more than 20 years. But the Brazilian case – and for that matter, those of other Latin American countries – is peculiar because its stagnation was triggered by a sovereign debt crisis. China has a sound – even too good by many opinions – international balance of payment and a Latin American-type of crisis is a remote possibility for the country.
Inside the country, several factors will help China maintain fast growth in the next several decades. The most significant is continuous improvement of young people’s educational achievement. The bulk of China’s workforce is rural migrants. Compared with a decade ago, men in rural areas aged between 21 and 29 have two more years of schooling today and women in the same age group have 2.6 years more. In the city, the average years of schooling have reached 11 for both men and women in the same age group. The government has announced a national plan of education for 2020. One of its aims is to allow rural young people to finish high school (including professional high school) education. Another aim is to raise the college enrolment rate to 40 per cent.
The return to education is high, averaging 10 per cent for one additional year of schooling. The schooling gap between people aged from 21 to 29 and those between 50 and 59 is 4.3 years. This means the new generation is 43 per cent more productive than the old and retiring generation. This will more than offset the loss of labour in the coming decade. Nobel Prize laureate Robert Fogel predicts China’s economy would be 40 per cent of the world total in real terms by 2040. I asked him if this prediction was too optimistic when I met him in Chicago last November. His answer was no. Instead, he believed that improvement of education alone would allow China to do that.
Improvement of education is supplemented by the Chinese government’s investment in research and development. By the 12th Five-Year Programme, R&D expenditure will be increased from the current 1.7 per cent of GDP to 2.2 per cent of GDP in 2015. This will place China close to the rank of developed countries.
The world economy of this decade resembles that of the 1980s in many ways. On one count, it will probably be as sluggish as the 1980s. However, that decade witnessed the rise of the East Asian tigers. China has a much bigger economy than the tiger economies and export cannot be a long-term driver of its growth. But China can also benefit from having a large population. The recent growth of household consumption is an encouraging sign. It is likely that the country’s economy will continue to turn to domestic consumption to look for growth. As the level of income increases, the advantage of a large country will only become stronger. In the end, China will be likely to maintain an average rate of growth of 8 per cent before 2020. This will probably allow the country to take over the US to become the largest economy in nominal term by 2020.
The writer is director and professor at the China Center for Economic Research, Peking University