China economy

Growth warning

With its economy ticking at a fast pace, a senior IMF official has warned the country's new leaders to focus on quality, and not quantity

PUBLISHED : Wednesday, 20 March, 2013, 12:00am
UPDATED : Wednesday, 20 March, 2013, 4:35am

China's so-called "Dream Team" finally took office last week, with Li Keqiang taking the second job to President Xi Jinping as premier and economic supremo.

As far as the world is concerned, China has raced from strength to strength with unprecedented real growth rates never seen before in the world, not for one year or one decade but for 30 years.

It now stands on the brink of surpassing the United States as the world's biggest economy, and growth is still ticking ahead at 7.5 to 8 per cent, while developed countries are languishing, barely able to record positive growth and crippled with heavy debts.

So the Dream Team should be able to dream about a great future for China. However, Xi and Li were warned last week by a leading Chinese international political economist that the way the country is growing, the dream economic growth could easily turn into nightmares.

Zhu Min, a deputy managing director of the International Monetary Fund, called on China to create jobs and boost wages in an effort to raise consumption and move away from its unhealthily high levels of investment.

He warned that the heralded headline growth figures could be misleading and China needed to look at the quality of its growth, not just the quantity.

"The key issue for China is not growth … It is the quality of growth and reform," he said.

"China should discourage investment.

"Currently, loans are cheap and the factor price is so low - energy, transportation, water, power - those things all encourage the expansion of investment."

Too much of China's resources are going into investment that it had "squashed people's income levels".

Zhu's prescription was that money should be pushed to ordinary Chinese and that the country's hitherto neglected services sector should be developed as a twin growth track with manufacturing.

He said over-concentration on investment meant that only 60 per cent of China's industrial capacity was being used.

Zhu was talking at his alma mater Johns Hopkins University about "The Changing Global Economy".

In his main talk, China figured as one of several major players in an increasingly interconnected global economy, but when he was asked questions, he offered his advice to his own country's new leaders.

Zhu noted that this year for the first time, developing countries would account for more than 50 per cent of global growth measured on a purchasing power parity basis.

What Zhu was saying about China is not a new opinion. Some other economists and US officials have warned that China needs to rebalance and encourage greater consumption, which has fallen to about 35 per cent of gross domestic product, against the mid-50s, which would be expected from a burgeoning new power.

What makes Zhu's comments interesting is that he is a formerly highly placed official in China, who was deputy head of the People's Bank of China. He joined the IMF in 2010, initially as a special adviser to then managing director Dominique Strauss-Kahn in response to criticism from Beijing that China was under-represented in the fund in relation to its rising economic power.

Zhu said he expected China's growth this year would be between 8 and 8.25 per cent. Disappointingly, he did not venture any criticism of the figures, which, miraculously for such a sprawling complex country, generally appear within a few days of the end of the period to which they relate.

Other, more sophisticated countries, like Japan and the US, take longer to produce their figures, causing sceptics to claim that China's figures are fake or calculated well in advance.

Li Keqiang in a private dinner in 2007 with the US ambassador, described China's GDP figures as "man-made" and unreliable, according to a diplomatic telegram obtained by Wikileaks.

Some Chinese economists live in hope that increasing consumption spending will be a natural process of demographic trends whereby the ageing population and declining workforce, thanks to the one-child policy, will begin to eat the pile of savings.

But thoughtful economic commentators, notably Professor Michael Pettis of Peking University, say that demographic changes are "just too slow to accomplish what is needed in the next half-decade".

Pettis says that rebalancing China's economy is a complex and complicated process with wide-ranging implications, some of them uncomfortable for politically well-connected vested interests.

He believes that China's economic development model is not new. The grandfather of the model was the first US treasury secretary, Alexander Hamilton. "I think of China's growth model as merely a more muscular version of the Japanese or East Asian growth model, which is itself partly based on the American experience."

The model has three elements: infant industry tariffs; internal improvements including infrastructure; and a sound system of national finance.

He adds wryly that the US imposed tariffs and other measures to raise costs to foreign manufacturers to allow US industrialists to compete in the home market. "In addition, Americans had to acquire as much British technological expertise as possible (which usually happened in the form of intellectual property theft)."

There is little new under the sun.