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Wednesday, 7 October 2009
China in 2049 - enhancing quality
As the People’s Republic of China celebrates its 60th anniversary, it is tempting to ponder what the future holds for its centenary celebration some 40 years from now.
As the People’s Republic of China celebrates its 60th anniversary, it is tempting to ponder what the future holds for its centenary celebration some 40 years from now.
For China, 2049 should be emblematic of yet another important milestone for what will then easily be the world’s largest economy. Significantly, the state-directed model of export and investment-led growth that served China so well during the first 60 years of the PRC will have faded into the background by the middle of the 21st century - replaced by a new strain of higher quality and better-balanced economic growth.
This new leg of China’s remarkable development became an urgent imperative during the Great Global Crisis of 2009. A wrenching synchronous recession in the developed world unmasked a major pitfall of China’s unbalanced growth model: No export-led economy - not even one as efficient as China’s - can sustain rapid increases in living standards in the context of a weak external demand climate.
At first, China didn’t understand this critical constraint. It thought the main engine on the demand side of the world economy - the American consumer - would bounce back as it always did. It also believed that another ‘proactive fiscal stimulus’ aimed largely at bank-funded infrastructure spending would buy time until external markets healed and the Chinese export machine could re-start.
It wasn’t until 2010-11, however, when China realised those dreams were in tatters. The American consumer had, in fact, entered a multi-year retrenchment, and no other consumer had the wherewithal to step up and take its place.
Lacking support from internal private consumption, an export-led Chinese economy suddenly found itself in serious trouble - it needed a new source of economic growth. And so it turned to its greatest assets - its 1.3 billion citizens - to tap that potential.
It was a daunting transition. China finally realised that it wasn’t the so-called Asian saving mindset that was holding its consumers back. It was, instead, a more basic constraint - the lack of income security engendered by an inadequate social safety net. Chinese families saved increasingly out of fear - not out of habit or tradition. The Chinese leadership had correctly identified this problem when the 11th Five-Year Plan was enacted in 2006.
But it failed to deliver in pushing ahead in the critical areas of social security, private pensions, medical insurance, and unemployment benefits. The private consumption share of its GDP fell below 35 per cent in early 2009 - a record low for China and, for that matter, for any large economy in the modern annals of economic history.
The 12th Five-Year Plan enacted in 2011 was China’s wakeup call. The economy had slowed again in a weak external demand climate and the Chinese government had no choice other than to shift to a different model that drew greater support from internal demand.
The new plan laid out two clear goals - lifting the consumption share of China’s GDP to 50 per cent by 2016 and doubling the safety net provisioning of social security and medical insurance. At the same time, the State Council enacted a major private pension reform aimed at further encouraging Chinese households to reduce precautionary saving - long the missing link in a major awakening of internal private consumption.
With the reductions in excess saving, China’s current account and trade surpluses declined - underscoring the vast potential for China’s trading partners to participate in the expansion of its enormous base of domestic demand.
China-centric trade tensions faded - no longer posing a serious threat to globalisation, China’s consumer-led rebalancing had another critical plus: By 2020, there was a decisive shift in the mix of its GDP away from the industrial production underpinnings of exports and investment - thereby reducing the commodity and energy content of economic activity.
The result was a lighter, cleaner, more environmentally friendly economy - enhancing the long-neglected quality dimension of the Chinese growth experience.
With better balance and higher quality growth, China finally converted scale into true and sustainable global leadership - setting itself up for even greater potential in the next 100 years of its remarkable development journey.
The writer is chairman of Morgan Stanley Asia and author of The Next Asia (Wiley). This article was sourced from Morgan Stanley
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China in 2049 - enhancing quality
By STEPHEN ROACH
06 October 2009
As the People’s Republic of China celebrates its 60th anniversary, it is tempting to ponder what the future holds for its centenary celebration some 40 years from now.
For China, 2049 should be emblematic of yet another important milestone for what will then easily be the world’s largest economy. Significantly, the state-directed model of export and investment-led growth that served China so well during the first 60 years of the PRC will have faded into the background by the middle of the 21st century - replaced by a new strain of higher quality and better-balanced economic growth.
This new leg of China’s remarkable development became an urgent imperative during the Great Global Crisis of 2009. A wrenching synchronous recession in the developed world unmasked a major pitfall of China’s unbalanced growth model: No export-led economy - not even one as efficient as China’s - can sustain rapid increases in living standards in the context of a weak external demand climate.
At first, China didn’t understand this critical constraint. It thought the main engine on the demand side of the world economy - the American consumer - would bounce back as it always did. It also believed that another ‘proactive fiscal stimulus’ aimed largely at bank-funded infrastructure spending would buy time until external markets healed and the Chinese export machine could re-start.
It wasn’t until 2010-11, however, when China realised those dreams were in tatters. The American consumer had, in fact, entered a multi-year retrenchment, and no other consumer had the wherewithal to step up and take its place.
Lacking support from internal private consumption, an export-led Chinese economy suddenly found itself in serious trouble - it needed a new source of economic growth. And so it turned to its greatest assets - its 1.3 billion citizens - to tap that potential.
It was a daunting transition. China finally realised that it wasn’t the so-called Asian saving mindset that was holding its consumers back. It was, instead, a more basic constraint - the lack of income security engendered by an inadequate social safety net. Chinese families saved increasingly out of fear - not out of habit or tradition. The Chinese leadership had correctly identified this problem when the 11th Five-Year Plan was enacted in 2006.
But it failed to deliver in pushing ahead in the critical areas of social security, private pensions, medical insurance, and unemployment benefits. The private consumption share of its GDP fell below 35 per cent in early 2009 - a record low for China and, for that matter, for any large economy in the modern annals of economic history.
The 12th Five-Year Plan enacted in 2011 was China’s wakeup call. The economy had slowed again in a weak external demand climate and the Chinese government had no choice other than to shift to a different model that drew greater support from internal demand.
The new plan laid out two clear goals - lifting the consumption share of China’s GDP to 50 per cent by 2016 and doubling the safety net provisioning of social security and medical insurance. At the same time, the State Council enacted a major private pension reform aimed at further encouraging Chinese households to reduce precautionary saving - long the missing link in a major awakening of internal private consumption.
With the reductions in excess saving, China’s current account and trade surpluses declined - underscoring the vast potential for China’s trading partners to participate in the expansion of its enormous base of domestic demand.
Consumer-led rebalance
China-centric trade tensions faded - no longer posing a serious threat to globalisation, China’s consumer-led rebalancing had another critical plus: By 2020, there was a decisive shift in the mix of its GDP away from the industrial production underpinnings of exports and investment - thereby reducing the commodity and energy content of economic activity.
The result was a lighter, cleaner, more environmentally friendly economy - enhancing the long-neglected quality dimension of the Chinese growth experience.
With better balance and higher quality growth, China finally converted scale into true and sustainable global leadership - setting itself up for even greater potential in the next 100 years of its remarkable development journey.
The writer is chairman of Morgan Stanley Asia and author of The Next Asia (Wiley). This article was sourced from Morgan Stanley
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