The factory of the world will give way to a more mature economy with its 1.3 billion people, says Stephen Roach, as he predicts China’s future
Stephen Roach 30 September 2009
For the People’s Republic of China, 2049 should be emblematic of yet another important milestone for what will then 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 republic will have faded into the background by the middle of the 21st century - to be replaced by a new strain of higher quality and better-balanced economic growth.
For China, this new leg of its remarkable development became an urgent imperative in the “Great Global Crisis” of this year. 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 restart.
It is not until 2010-11, however, that China realises those dreams are in tatters.
The American consumer will have, in fact, entered a multi-year retrenchment, and no other consumer has the wherewithal to step up and take its place. Lacking support from internal consumption, an export-led Chinese economy suddenly will find itself in serious trouble - it needs a new source of growth. And so it turns to its greatest assets - its 1.3 billion citizens - to tap that potential.
It is a daunting transition. China finally realises that it isn’t the so-called Asian-saving mindset that is holding its consumers back. It is, instead, a more basic constraint - the lack of income security engendered by an inadequate social safety net. The Chinese leadership had correctly identified this problem when the 11th Five-Year Programme 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 gross domestic product fell below 35 per cent early this year - a record low for China and, for that matter, for any large economy in the modern annals of economic growth.
The 12th Five-Year Plan that will be enacted in 2011 will be China’s wake-up call. The economy will have slowed again in a weak external demand climate and the central government will have had no choice other than to shift to a model that draws greater support from internal demand. The new plan will lay 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 will have enacted a major private pension reform to further encourage Chinese households to reduce precautionary saving - long the missing link in a major awakening of internal private consumption.
China’s consumer-led rebalancing will have another critical plus: By 2020, there will be a decisive shift in the mix of GDP away from the industrial production underpinnings of exports and investment - thereby reducing the commodity and energy content of economic activity.
The result will be 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 will finally convert scale into global leadership - setting itself up for even greater potential in the next 100 years of its development journey.
Stephen Roach is chairman of Morgan Stanley Asia and author of The Next Asia, published this month
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A journey into the economic leap forward
The factory of the world will give way to a more mature economy with its 1.3 billion people, says Stephen Roach, as he predicts China’s future
Stephen Roach
30 September 2009
For the People’s Republic of China, 2049 should be emblematic of yet another important milestone for what will then 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 republic will have faded into the background by the middle of the 21st century - to be replaced by a new strain of higher quality and better-balanced economic growth.
For China, this new leg of its remarkable development became an urgent imperative in the “Great Global Crisis” of this year. 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 restart.
It is not until 2010-11, however, that China realises those dreams are in tatters.
The American consumer will have, in fact, entered a multi-year retrenchment, and no other consumer has the wherewithal to step up and take its place. Lacking support from internal consumption, an export-led Chinese economy suddenly will find itself in serious trouble - it needs a new source of growth. And so it turns to its greatest assets - its 1.3 billion citizens - to tap that potential.
It is a daunting transition. China finally realises that it isn’t the so-called Asian-saving mindset that is holding its consumers back. It is, instead, a more basic constraint - the lack of income security engendered by an inadequate social safety net. The Chinese leadership had correctly identified this problem when the 11th Five-Year Programme 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 gross domestic product fell below 35 per cent early this year - a record low for China and, for that matter, for any large economy in the modern annals of economic growth.
The 12th Five-Year Plan that will be enacted in 2011 will be China’s wake-up call. The economy will have slowed again in a weak external demand climate and the central government will have had no choice other than to shift to a model that draws greater support from internal demand. The new plan will lay 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 will have enacted a major private pension reform to further encourage Chinese households to reduce precautionary saving - long the missing link in a major awakening of internal private consumption.
China’s consumer-led rebalancing will have another critical plus: By 2020, there will be a decisive shift in the mix of GDP away from the industrial production underpinnings of exports and investment - thereby reducing the commodity and energy content of economic activity.
The result will be 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 will finally convert scale into global leadership - setting itself up for even greater potential in the next 100 years of its development journey.
Stephen Roach is chairman of Morgan Stanley Asia and author of The Next Asia, published this month
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